We’ve all heard about payday loans – and most of us have either taken a payday loan out or know someone who has.
A payday loan is basically an advance on your pay cheque so when payday comes the amount you borrowed, plus interest will automatically be deducted from your account. Some micro lenders refer to a payday loan as a “1 hour loan” and you may also hear terms such as a payday advance, salary or cash advance loan – all of these refer to the same thing – a short term loan.
On average payday loan terms span a mere two weeks, so more people tend to take out a payday loan in the middle of the month then repay it at the end of the month.
Payday loans are unsecured, short term, high-interest loans.
This means that in order to get a payday loan you need not put up any collateral like you would when financing a vehicle.
Payday loans have been gathering a lot of negative publicity as their popularity has increased over recent years and this may be the reason for the recent cap imposed on loan providers by the Financial Conduct Authority (FCA). This cap means that micro lenders may not allow borrowers to repay more than double what they loan. This cap which has essentially lowered the cost of taking out a loan is now sitting at 0.8% per day.
New regulations protect borrowers.
Another newly introduced regulation that aims to protect borrowers struggling to repay their short term debts is the fee cap of £15.
The third new regulation is a total cost cap of 100% which means that borrowers should not have to repay more than the sum of money they lent in fees and interest.
The loan industry simply boomed overnight and it is estimated that there are over 240 known micro lenders in operation in the UK. The latest statistics have revealed that of these 240 providers 3 of them share more than half the market share based on turnover and loan values.
Strong demand for loan services.
Generally speaking payday loans are designed to help pay overdue bills, unexpected medical bills, vehicle and household repairs but many times they’re used for other non-emergencies such as purchasing luxury items and funding family outings.
Although in a crisis taking out a payday loan that gives you almost instant access to some cash flow makes sense – it is important to consider the fact that short term loans have high interest rates and can have a detrimental effect on your financial situation if you fail to make the payments. It’s estimated that the average pay day lender will loan six times per year and if we consider that more than half of the overall profit made by borrowers comes from rollovers – it becomes quite apparent that the major issue with payday loans is the inability to repay them on time.
Before you consider a payday loan, it’s recommended that you rule out other ways of getting access to some cash. This can include selling any valuables you no longer need, borrowing from family or friends or even asking for an advance on your pay check from your employers.
How much higher you may ask?
Well, even with the recent caps a payday loan will cost you more in a single month than a credit card would for a whole year.
If you do decide to use a credit card then you must still ensure you can clear it by the next month. If you have a limit on your credit card you should contact your bank and try getting the limit increased – its well worth it if you can avoid the interest that you'll be paying for a short term loan. If you can get a 0% interest spending card then this is obviously going to be the best way to help you get out any sticky financial situation.
It may take anything up to three weeks to get the card issued – so this is not going to help you if you're in desperate need of cash immediately but apply for it now because should you be strapped for cash again you will have it readily available to help take some strain off of your pay check. Even if you have a poor credit history you may still be able to get a 0% interest cards – the difference is that the deal will be shorter than the maximum 29 months those with good credit can get.
Remember that if you don't make the minimum payment on the 0% interest card you will lose the 0% deal and always clear the card before the deal term ends to avoid having to pay interest. Another cheaper option than a payday loan is to try getting a loan from a local credit union but again, this is only an option if you have some time to spare.
If you're looking for a way to pay off other outstanding debts – getting a payday loan is definitely not a good idea – if you couldn’t make the payments on those other debts chances are you won’t be able to pay the payday loan either.
Only consider a payday loan if you are 100% certain that you will have the money to pay it back – never go into it with the idea that that if you can’t make the payment when you get your pay check you'll just ask for a rollover – this is how a debt spiral begins so think long and hard about it first.
Many people worry that getting a payday loan will negatively affect their credit reports but the simple truth is that it will only affect it if you fail to make the payments. A payday loan may show up on your credit report but traditional lenders such as banks will not view this as a negative thing if you’ve made your payments and cleared the debt unless you have taken out multiple short-term loans in a fairly short space of time.
The reason is that it will suggest that you cannot budget correctly and are experiencing serious financial pressure.
Do you homework on the Micro Lender.
So let’s assume at this point that you’ve considered all the alternatives and still need a payday loan to get you through the month – or through a crisis. The first thing that you should do if it’s the first time you're taking out a payday loan is to check up on any loan provider but doing a bit of quick research. You're probably better off going with one of the larger providers rather than a lesser-known provider but regardless of which you choose you should always make sure that they are registered with at least one trade body such as the Consumer Finance Association (CFA) or the Consumer Credit Trade Association (CCTA).
To avoid fly by night scams it may also be worth it to check that the provider lists an address on their website. Usually you'll get the money 24 hours after you’ve been approved for a payday loan but if you need “same day” cash then you may incur a fee for this.
A tip worth mentioning is that some lender may reduce the cost on their loans if you repay it earlier than the agreed date – if you think you can achieve this then you should look for a lender that provides this option. Many providers will require that a Continuous Payment Authority be set up – so that they can make more than one attempt to retrieve they money you owe them from your account if their first failed due to insufficient funds. You need to be careful of this because CPA’s are difficult to cancel and you may incur additional fees from your bank.
It also helps to know what your rights are when you’ve taken out a loan – especially when you can’t make the payment as agreed. Loan providers cannot make more than two attempts to deduct money from your account or even deduct a partial amount and additionally it may help to know that if you don't pay anything for 60 days they will freeze the interest and charges but they’ll damage our credit report by reporting you to credit reference agencies – so avoid this at all costs.
To get a payday loan you will need to provide proof that you're employed, have an existing check or savings account open for no less than 30 days, and be 18 years or older, have a valid social security or individual taxpayer identification number and be a UK resident.
Some providers have flexible payment options that allow you to pay the payday loan in up to three instalments and you can make an online application 24 hours a day, seven days a week.
If this is the first time you’ve taken out a payday loan then you will have a smaller limit then if you’ve previously taken out a payday loan and choose to use the same provider but don't be tempted to take out more than you really need. Additionally once you’ve taken out a payday loan and repaid it you'll be seen as a good customer and probably receive some form of communication from the provider. This will be in the form of an email or text message to try and encourage you to take out another loan – but you should avoid being tempted by this at all costs even when you're offered a “special offer”.
The reason that they send out marketing communications is that they know that once a person has taken out a payday loan once, they’re much more likely to do it again.
Statistics have actually shown that the average payday lender will take out 6 loans a year – that amounts to a lot of interest. If you find that you're struggling to cope till the end of them month you should review your spending habits and budget to see where you're problems stem from.
There are two major factors that make payday loans a popular choice for resolving temporary cash emergencies; the first being that there are no credit checks conducted when taking a loan – so those with poor credit scores can also apply and secondly the fact that it is easy to apply and the money is credited really fast. Most payday lending is now done online and you can have the money credited to your account within only 15 minutes.
Students can also apply to get a payday loan.
Particularly from loan providers who specifically target students but these lenders will almost always loan only small amounts – much less than regular payday lenders. This is obviously due to the fact that students always have a very low income. They will review how much you're receiving from your student loan to determine how much they’ll lend you.
Putting your education at risk is never worth it no matter how badly you need the money so make sure you have a parent or family member who will be able to help you out if you can’t replace the money you’ve used to repay the loan.
What if you're unemployed?
If you're looking for a payday loan and are currently not employed you may still be able to qualify if you can prove that you have some form of income or if you can have a guarantor accept responsibility for the loan, should you be unable to repay. You'll obviously be better off borrowing the money directly from the person who would act as your guarantor so try to make this arrangement first.
In summary, try to avoid any short-term high-interest debt and if you're backed into a corner and need some cash fast, only take out a payday loan if you are certain that you can repay it.
Always ensure you use a reputable provider and that you don't make a habit of using payday loans to get through the month.