What are Payday Loans? 5 Important Questions Answered
So what are payday loans UK exactly? To give you a clear picture of what they are, payday loans are designed to be availed over a short period of time to address certain financial needs. Typically, a payday loan follows three distinct features:
- Offered in small amounts
- Payments due in the costumer’s next payday
- Requires borrowers to grant lenders access to their checking account
They are popular options among average income consumers as a means to obtain cash to fund an unexpected expense. And unlike mainstream personal loans, their maturity dates come in days or weeks rather than years which makes it a viable stop gap until the next paycheck arrives.
1.) What are Payday Loans – What is the Maximum Amount You can Borrow?
The maximum amount that you can borrow is generally around £1,000, although there are lenders who won’t offer the maximum amount on first-time borrowers. Payment periods are normally for 2-4 weeks although it could get much shorter or longer depending on the lender. Some lenders offer loans that have maturity dates of over five days to five months and there are even those that provide one-day loans. Setting up the loan would generate fees as well as interest rates.
2.) What are Payday Loans – Are They Costly?
Generally speaking, payday loans are costly but as long as you make the proper repayments, they are really not that expensive when compared to traditional credit options. Taking out a £90 loan for three days, for example, would typically cost you around £9, which, most often than not, is less the charges you would incur from a bank through an unauthorised overdraft. While interest-free credit cards might prove to be better alternatives, they are simply options that are not readily available to many people due to their current credit rating. As payday loans have no credit check they are a fantastic option for those of us that have let finance slip in the past.
Keep in mind, though, that the extra fees can pile up in an instant once you miss out on your payments or decide to extend or roll over the loan. What started as a small credit for several hundred pounds could quickly turn into one big thorn in your budget.
3.) What are Payday Loans – Should I Apply for a Payday Loan?
Payday loans are worth considering especially if you’re in an emergency situation. Medical fees and car repairs are some of the ideal expenses for these short-term credits. Never take out a loan, however, for unnecessary expenses. If you are planning to purchase a brand new computer for example, then just try to save for it. This way, you won’t have to shoulder additional costs that you will incur in taking out a loan. If a certain expense or purchase can wait, then don’t take out a loan but if it can’t, then consider having a payday loan to address it.
4.) What are Payday Loans – How Quickly do They add up?
Say you want to take out a £300 loan from a certain lender who agrees to lend you the money for 14 days. After a couple of weeks, you need to pay the lender £345 – the additional £45 as payment on interest rate and other fees. If you are unable to pay the said amount on the agreed date, the lender will charge you with an additional £30 as late payment charge. Now, if you have realised that you can’t make the proper repayment on time and decided to roll over the loan for another 14 days instead, you will now owe the lender £390.
If after another couple of weeks of extension, you are still incapable of paying off the money you owe and once again you decide to roll over the loan and this time for a full month, your debt will grow to £480. Thus, after two months, you will have incurred interest charges of £180 on a £300 loan – that’s more than 50% interest rate for a mere couple of months. This is a possible scenario for you when you take out a payday loan and don’t make the proper repayments on time.
5.) What are Payday Loans – What are the Alternatives?
Obviously, aside from payday loans, there are some alternatives that you can look into when you want instant cash for emergency situations:
- Create an emergency cash fund in your savings account, a popular option for consumers with more time.
- If you are looking for a larger lump sum over a longer term period then an instalment loan may be more suitable.
- Build a positive credit history so you will be eligible to take out loans from mainstream financing institutions.
- Always carry an open credit card to cover up emergency purchases and expenses
- Apply for a guarantor loan from a bank or credit union
- Borrow money from friends and family and enjoy loans with potentially zero interest rates
Those were five of the most important questions that people often ask about payday loans and now we have just answered them. Use the knowledge you have gained to make the better decision for you and your financial health.