Payday Loans
Some firms offers payday loans to those who are short of cash.
A payday loan is a short-term cash advance that needs to be paid back on your next payday or the one after.
You can usually borrow between £80 and £1,000, though this varies between providers.
You are charged a one-off fee rather than an interest rate.
A typical example of how payday loans are charged is as follows from a real-life example.
For every £100 you borrow, you are charged £25 each time you receive your salary, until the loan is repaid.
If you're paid monthly and you clear the loan debt on your second payday, you’ll be charged £50 (two lots of £25) per £100 borrowed.
Even though no interest is charged, you may see an interest rate quoted because payday loan firms are compelled to declare the equivalent annual interest rate to help borrowers compare costs with other loans. Sometimes, the rates quoted will be over 2,000%
This highlights that payday loans can be expensive, when you consider cheap personal loan rates are often between 5% and 15% depending on the economic climate. Standard credit card rates are often between 15% and 20%.
Many experts see payday loans as only useful as an absolute last resort if you cannot extend your overdraft, or if you cannot get a cheap personal loan, credit card, or advance from other organisations such as credit unions.
A 20% interest credit card would cost £20 a year, or £1.67 a month, assuming a constant £100 balance. Even on an expensive 40% credit card, the same debt would cost £40 a year or £3.33 a month.
Yet payday loans can still be cheaper than risking a high charge from your bank by exceeding the overdraft limit on your current account.
Some banks would charge you well over £300 if you exceeded your overdraft by £100 for two months, which is the typical length of a payday loan term.
Unlike more mainstream lending, your credit score or home ownership status makes little difference when getting a payday loan. In fact, such debt is often primarily aimed at those with poor credit scores or those in debt.
However, providers may ask you to justify what you need a payday loan for. Often, people use one to cover bills or an unexpected event. As long as your next pay cheque will cove the loan, it’s likely you will be accepted, though you’ll usually need to provide pay slips and bank statements to prove this.