While payday loans have long been popular in the United States, they are a comparatively recent service for UK customers, and a lot of people aren’t sure just what they are. With all the arguing over whether or not they’re a legitimate service or merely a type of legally accepted loan sharking, it’s a good idea for any GB citizen toying with applying to realise exactly what they’re signing up for.
A lot of us run out of income when nearing the close of the calendar month to some extent, and have to economize a little by trimming back on socialization or other forms of extra spending. This is an absolutely normal (if disagreeable!) fact of financial life for most of us who are working and are paid each month. Occasionally all the same, running out of cash can be more critical than this if there are important expenses to be paid such as an unexpected bill or repair cost.
Some people use the overdraft facility of their bank accounts to give them a bit of space when money is tight, but these days many people are permanently overdrawn and close to their limits, so this may not be an option.
An alternative way of tiding you over until your next salary is to use a credit card, both for buying things and cash withdrawals. There are assorted problems with this, including the fact that credit cards are a less than inexpensive form of borrowing, and it’s tempting to build up a big account balance which can have a calamitous effect on your long term financial health.
If neither of the last two options are right for you, then a payday loan may be worth thinking about. Briefly, these loans are available to virtually anyone with banking facilities and a debit card, and who is in regular employment. When you take a wage advance loan out, the lender will transfer the amount you ask for straight into your account, normally within 24 hours of your application being accepted. During your application you will have supplied your debit card information, and the lender will use these to automatically repay your loan on your next pay day, as well as their charges.
And in that lies one of the serious problems with cash advances – the cost.
This sort of borrowing is infamous for being high-priced, and staggering APRs of 1000% or even much higher are the norm. These APR figures are perhaps a little misguiding, as the APR system is designed for finance with a longer repayment term than payday loans where the term is measured in a matter of days rather than years. All the same, payday loans are rather pricy, with a fee of a quarter of your loan amount broadly the usual cost.
The next major drawback is that repaying your loan and fee is likely to leave you skint over again at the end of next month, and it’s simple to get into an expensive vicious cycle of applying for a loan each month – which is when those high APR rates will really bite.
So, is there any benefit to a wage day loan? Yes, but only in truth for a real emergency where there isn’t an alternative. If you’re using payday loans to pay for your everyday life, then it would be better to study your finances and consider where you can economise, or to reconstitute your debt using a consolidation loan or similar to set free some supplemental money every month.
About the author: Martin Sumner writes on finance and credit issues, and is currently contributing to UK Pay Day where you can arrange short term loans until your next wage comes in.