If your boiler’s gone crash, bang, wallop or your car is spluttering suspiciously, you may have a payday loan in your sights. But is a payday loan the answer to your problem? And if you do decide to take a payday loan to get you out of a sticky jam, how do you make sure you get the best deal and avoid even stickier situations?
Don’t just snap up the first personal loan offer that comes your way, read our guide so that getting a payday loan doesn’t end up being a painful experience for you…
What is a Payday Loan?
When the coffers are bare and an emergency lands, we all find ourselves wishing that payday would come around a little bit quicker. And that, my friend, is the premise behind a payday loan. With a payday loan you can generally borrow amounts between £100 and £1,000 – the sort of figures that could be covered by your monthly salary. You’ll usually pay it back along with the agreed interest within a few weeks or a calendar month, basically once payday arrives.
You may arrange to pay the loan back in one lump sum, or broken down into a few payments. As a small, unsecured loan, you will usually have fixed payment amounts, so you know in advance what you need to pay and when. Before you get over excited and make applications all over the place, there are some serious things to meditate on with this type of borrowing. Because the period of lending is short, the interest rates are generally very high. Payday loans are expensive, so they’re really only for emergencies.
Payday loans: a summary
- Generally between £100 & £1000
- Usually have high interest rates
- Usually used for emergencies only
When you sign up for a payday loan, the provider will usually ask you to agree to something called a Continuous Payment Agreement (CPA), which means they can take your repayment(s) for your loan straight from your bank account. While this is quicker than trotting across town to hand the cash back in person, it does come with some risks.
Risks of a Payday Loan
Without careful planning to make sure you have enough money in your account for things like your rent, you might end up missing payments on life’s essentials, or being charged a fee for not making your loan payment. When that happens, it brings more than bad karma your way. You could be in line for a default fee, which means your loan costs you more. It can also harm your creditworthiness and make it harder for you to get credit in the future.
Nowadays, there are rules in place to protect you, by limiting the fees around payday loans. If you don’t pay on time you can be charged a maximum of £15 plus interest on the original amount borrowed. However, even if you meet all your payments on time you should recognise that payday loans are not a cheap option. The overall amount you can be made to pay back including interest and fees is up to twice the amount you originally borrowed. Taking out a payday loan could impact your credit rating too as it can show as a different kind of borrowing on your credit file, though it’s not something all lenders consider a negative if you pay your loan back successfully. That said, it’s definitely not an area of borrowing to dip into regularly.
What’s the Best Payday Loan?
Since interest rates for payday loans are high, is there any point shopping around? Of course there is my friend, and not just so you can find the best annual percentage rate (APR). A Representative APR is the annual percentage rate at which, the firm reasonable expects at least 51% of credit agreements to be entered into as a result of a promotion. So, if you are accepted you might not qualify for that particular rate. Secondly, remember that when you’re borrowing it’s not just about the interest rate.
To find the best payday loan lenders for you, check for things like fee-free payout options. These give you the option to settle your loan early without added fees. You might want to check how soon the money could be in your account too, if you’re in a real rush.
If you’re concerned about using a continuous payment authority (CPA), some lenders may also allow you to pay your loan without a recurring payment agreement, so that you don’t need to worry about it debiting from your account as other bills land. Make sure you’re clear when and how you need to make payment if you go down this route.
If you’re borrowing a sum that won’t be paid back easily out of one salary payment, some lenders allow you to borrow over a slightly longer period, which may suit you better. Don’t forget that you’ll pay more in interest for this convenience. Planning ahead so that payments are manageable is likely to be a better strategy than paying late or even rolling over with your provider’s agreement, as this can lead to debts mounting.
Be Aware of the Overall Cost
Whatever you do, don’t be tempted to borrow more than you need just because it’s offered, or to borrow from one lender to payback another. With high interest rates in play, things could soon get out of hand. Some payday providers advertise special deals like a fixed fee or percentage off your first loan repayment. As ever, don’t let a special offer detract you from the overall cost of a loan either. So, which payday loan is best? That really depends on you.
To help you stay focussed and get a clear idea of the costs involved with borrowing, our MoneyMatcher searches using your requirements and displays the total cost of borrowing for easier comparison.
Alternatives to Payday Loans
It’s so stressful when things go wrong, often you just want to fix them fast, but think carefully about whether you need a loan at all. If there’s a bill you need to pay, could you arrange a payment plan direct, so that you can pay in instalments?
Consider Your Lending Options
If you definitely need to borrow, even if your credit rating isn’t great, you shouldn’t automatically assume that a payday loan is your only lending option. Make time to check your credit file to help guide your path. Think about asking your bank if you could temporarily extend your overdraft, if you haven’t already. For those with a good to fair credit rating, a 0% or low interest credit card could be an option. Provided you can pay them off quickly, they could be a cheaper way for you to borrow fairly fast.
When you’re sure a payday loan is the choice for you, be clear how you will pay it back – failing to do so could really impact on your future. And when your finances are in a healthier place, start a strategy for fuelling a rainy day fund. That way, next time an unforeseen expense lands, you’ll have a little more wiggle room and won’t need a loan to tide you over.