When it comes to short term loans, everyone has heard of payday loans. But what do you really know about how they work? Are the interest rates as high as people think, and are there any advantages to taking out a payday loan?
As with most things, there are advantages and disadvantages to taking out any sort of loan. We’ve discussed some of the main points below, but whether you choose to get a payday loan will depend on a number of personal factors, such as how much you’re looking to borrow and your credit history.
What is a Payday Loan?
Before we discuss the positives and negatives of payday loans, what actually is a payday loan? A lot of people use the term ‘payday loan’ as a generalisation for short term loans, but a payday loan is actually a particular type of short term loan. Unlike an instalment loan, where you’d make monthly payments, with a payday loan you repay the loan in one lump sum. This is typically on your next payday, hence the name.
Payday loans tend to be for smaller loan amounts than instalment loans too. This is because it’s generally difficult to pay a large one-off payment from your wages – if you need a larger loan, it’s usually better to spread the cost over a few repayments. A payday loan is typically between around £100 and £500, and borrowed over a few days to a few weeks.
In terms of interest rates of payday loans, you may see advertised rates of over 1000% APR. Don’t panic – this doesn’t mean that you’ll be paying back more than a thousand times what you borrow! APR stands for Annual Percentage Rate, so is less relevant for payday loans, which are never taken out for more than a few weeks. For example, a payday loan of £200 borrowed for a week would only cost you around £10 in interest.
Loan Till Payday
The main benefit of a payday loan is that you can get cash fast, to cover any unexpected costs before your next payday. When an emergency expense crops up, from a broken boiler to a leaky roof, you’ll generally need the money as soon as possible. Most payday lenders aim to pay out loans within a few hours of approval, or by the next business day.
Payday loans are also very flexible. With long term loans, you may end up borrowing more money than you need, over a long period of time, which can cost a lot in interest. And many bank loans charge an early repayment fee. With a payday loan, you can borrow exactly how much you need, and choose the duration and repayment date. There are almost never early repayment fees with payday loans either.
Payday loans are additionally a good option for people with bad credit. For larger loans, a lot of weight is put on your credit file and credit score, but with a payday loan, lenders are typically more concerned with factors like your income and expenditure and your employment status. As responsible lenders, they won’t give you a loan if you’re not able to comfortably afford the repayments, but if you’re able to pay back the loan without difficulty, you should be able to get the funds you need.
It’s also important to note that borrowing can improve your credit rating. If you don’t have much of a credit footprint, or haven’t recently borrowed, lenders can’t see how you manage your money. By taking out a loan and making the repayments on time, you are demonstrating that you can budget well, which can then increase your credit score and chances of future borrowing.
- A payday loan is repaid in one full payment, usually when you next receive your wages
- The benefits of a payday loan include flexibility, quick cash, and how accessible they are, particularly for those with a poor credit rating
- To be eligible for a payday loan, you need to live and work in the UK, be aged 18 or over, and have a working email address and mobile
Payday Loan Eligibility
As discussed, one of the benefits of payday loans is how accessible they are – even if you have a bad credit history, you should still be able to get a loan. When it comes to eligibility in general, while the criteria can vary slightly from lender to lender, for the most part, as long as you meet the following requirements, you should be eligible for a payday loan.
- Have a regular income through part time or full time employment
- Be aged eighteen or above
- Live in the UK and have a UK based bank account
- Have an active email address and mobile phone
If you’re looking for a payday loan and meet the above criteria, My Financial Broker can help! We’ll put you in touch with a reputable lender that should be able to pay out your loan within hours of approval. And best of all, our services are completely free.