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If your boiler’s broken down or your car is spluttering suspiciously, you may have a payday loan in your sights. But is it the answer to your problem? And if you do decide to take a payday loan how do you make sure you get the best deal and avoid spiralling debt?

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 bank balance is low 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 again.

Payday loans are normally paid back in one repayment. If you would rather pay it back over a few instalments then you should look into short term loans, as these can go up to 12 months. You will know in advance what you need to pay and when. Before you get over excited and start making lots of applications, there are some serious things to consider 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 Authority (CPA), which means they can take your repayment(s) for your loan straight from your bank account. While this is both quick and convenient, it does come with some risks.

Risks of a Payday Loan

If you can’t afford the repayment alongside your regular living costs, you could incur some hefty fees for failing to repay. If you fail to make a payment, you’ll probably be charged a default fee. Not only will this cost money, it will also appear negatively on your credit history and could prevent your ability to access credit in the future.

There are rules in place to protect you, 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. Many lenders see payday loans as a sign of financial struggles, but they could also see it as a positive sign if you are continually making your payment regularly and on time. That said, it’s definitely not an area of borrowing to dip into regularly.

What’s the Best Payday Loan?

Researching payday loans will help you find the best annual percentage rate (APR). Whenever you’re looking at loan rates, don’t forget that the representative rate is only available to 51% of those accepted. So, if you are accepted you might not qualify for that particular rate. Secondly, remember that when you’re borrowing it’s not all 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 payments if you go down this route.

If you’re borrowing a sum that won’t be paid back easily out of one salary payment, you’ll need to look into short-term loans, which allow you to borrow over a slightly longer period and that may suit you better. 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.

View and compare Short Term Loans

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 pay back another. With high-interest rates 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.

Alternatives to Payday Loans

It’s 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?

Not sure a payday loan is for you? See which personal loan is best for me, or find alternatives to a personal loan here.

View and compare Short Term Loans

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 inform your choices. 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 your financial future. And when your finances are in a healthier place, start a strategy for fuelling a rainy day fund. That way, the next time an unforeseen expense lands, you’ll have a little more wiggle room and won’t need a loan to tide you over.