In simple terms, a payday loan is a sort of short-term advance that’s designed to help you pay for bills and other costs until payday arrives. Some companies allow you to choose your desired repayment period, rather than demanding that you repay the money on a specific day.
The problem with payday loans is that they can be extremely dangerous. Although they seem like a good idea, particularly to people who have bad credit histories and need to access finance quickly, the truth is that payday loans come with extremely high rates of interest that can end up getting you into severe amounts of debt very quickly.
Before you take out a payday loan, you will need to think very carefully about the options that you have for paying back the money that you’re going to owe. In other words, if you’re short of money for this month, you need to determine why you will be able to pay back the money that you need to borrow, plus the interest next month. For instance, you might be expecting additional income, or you may be able to cut back on spending considerably.
What Do Payday Loans Cost?
It’s hard to give an accurate assessment of what a payday loan is going to cost you without knowing your specific circumstances, but you can generally rest assured that these loans are going to be far more expensive to pay off than any of the alternative unsecured or personal loans that you might see on the market. In days’ past, most payday loan providers charged about £30 in interest for every £100 that you borrowed.
However, this only applied if you actually paid the loan that you owed back on time. If you weren’t able to make repayments as intended with your payday loan, then your provider would also charge another default fee, as well as daily interest. Today, new rules that have been implemented by the FCA ensure that borrowers should never have to pay over doubled what they borrowed to begin with. This is to assist with the problem of spiraling debts that has been impacted by payday loans.
Additionally, it’s worth noting that the same new rules dictate that anyone who is taking out a loan for a month and repaying the loan on time will not have to pay any more than £25 in fees and charges per the £100 they borrow. There is a further cap implemented onto default fees. However, even with these caps and regulations in place, it’s easy to see that a payday loan can be very expensive, and very dangerous when used without the proper care and attention.
Alternative Options to Payday Loans
In most circumstances, you’ll find that the best thing you can do when you’re desperate for cash, is consider alternatives to payday loans. Though a payday loan might seem like the only choice you have, there are usually other options out there. For example, authorized overdrafts on a current account are typically much cheaper than payday loans when it comes to short-term lending. However, unauthorized overdrafts are very expensive, so you should be absolutely certain that your overdrafts are authorized in advance.
Another potential alternative to a payday loan is to think about joining your available credit union. Usually, credit union loans will take a little longer to arrange than a standard payday loan, but the law limits the interest rates on these borrowing options to a maximum APR of 42.6%.
Additionally, even credit cards that are designed for people who suffer with bad credit ratings generally offer a far better deal than most payday loans. With an APR of around 30% you would still end up paying a lot less interest with this kind of credit card then you would have to pay on a payday loan. However, it’s important to note that you would have to be disciplined and make sure that you pay back your credit card balance over as short a period as possible.
In terms of credit card borrowing, if you only ever make the minimum repayments, miss out on the payments that you’re supposed to make, or you go over the limit that’s been implemented on your card, you could end up not only causing damage to your credit rating, but also facing severe charges and penalties that cause your debt to spiral far out of control.
Avoiding the Trap with Payday Loans
If you struggle to repay a payday loan, there’s a chance that the lender might try to tempt you with an extension called a rollover or a deferral. Alternatively, the lender may even provide a further loan. However, in this case, you will need to receive an information sheet with the providers of free debt advice before you roll over.
Although rolling your payday loan over can seem like a good idea at the time, it leads to paying a lot more interest and could cause serious financial problems.