A Guide to Payday Loans
As technology grew, and so did the Internet, it has changed much in our lives. And one big change is how we bank, and borrow money.
Almost all banks now offer online banking, where we can make payments, view our transactions, have money paid in, transfer money, and in general do everything banking related; all without having to go into the branch.
This is great convenience for us as customers, but many banks are closing branches due to the lack of foot traffic.
The next techno-step forward was mobile banking.
You could do all your banking on your mobile phone. And with apps like Apple Pay and other payment applications, you can also pay for purchases using just your mobile phone.
And since our mobiles are always with us, we can always use them.
With banking being changed by the Internet and technology, so was lending money. Traditionally aeons ago, we went to the local bank for a loan, filled out an application and waited. We waited for the loan to be approved or denied, and this could take hours, or in some instances, days.
As borrowers we wanted a quicker way to get a loan, so with the power of the Internet and credit scoring, a new way was devised to grants loans in minutes, and with the power of Internet banking and money transfers, the money could be in your bank account that day.
However, as borrowers we still were not happy, and many of us as borrowers had poor or bad credit from financial problems in the past. So not only did we want to get approved for a loan fast, but also be approved if we had bad credit.
So taking an old fashioned money lending idea from well over 125 years ago, and using today’s technology, we have what we today call payday loans.
Payday loans originated in the United States in the late 1800’s when workers would take out loans against their next wage packet or payday. There were no overdrafts, and not everyone had a bank account, or a bank they could go to for a loan.
In many instances the money was lent by the borrower’s employer.
Of course times change, and moving forward so did payday loans, until they grew to be so popular, they found their way to our shores.
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What is a Payday Loan?
A payday loan is just what it states, a short-term loan that is to be paid back on your next payday.
The loans are usually for amounts under £500, and are to be paid back in around 30 days or less.
The process of getting a payday loan is simple, you can apply online, and as long as you meet the lending guidelines which usually are:
* You are working
* You can provide a pay slip
* You have the ability to repay the loan
* You have a bank account
A payday loan can be approved within a very short period of time, less than an hour, and the money in the borrowers bank account very quickly, such as an hour.
As payday loans are short-term loans, and also somewhat of a risky loan to the lender, the interest rates tend to be much higher than other forms of borrowing. Payday loan interest rates can be as high as 1000%, 1500% or higher. This is due to the fact they are a short-term 30 days or less loan.
When the interest rates are expressed as an APR/annual percentage rate, they are high. We will explain APR’s in more detail later on.
In addition, as there is no credit history check or credit scoring, even borrowers with bad credit, or no credit can be approved. This is another reason why the interest rates are higher.
Who are Payday Loans For?
Payday loans are for anyone in need of a loan and can pay it back within the time scale of their next payday.
However, while payday loans are for anyone in need of a small loan, borrowers can usually be broken down into two (2) categories:
* Bad credit: Someone who is need of a quick loan and has bad credit, or possibly no credit, are prime examples of a payday loan borrower. There is no credit inquiries done for a payday loan. The loan is granted based on the borrower working, having a bank account, and the ability to repay the loan.
* Need money fast: Payday loans offer quick approval and money in the borrowers bank account within an hour or so. That is fast. If someone has a financial emergency such as a boiler needing repaired, or a car repair, and cannot wait until their next payday to have the repair completed, they may want to use a payday loan.
Alternatives to a Payday Loan
While payday loans are a quick way to borrow money, and are good for those with bad credit, they can also be an expensive form of borrowing, due to their high interest rates.
There are alternatives to taking out a payday loan, and depending on the borrower’s need and circumstance, these may be more attractive and less costly.
Friends and family: It is not always a good idea to “hit-up” family or friends for a lend, but in some instances for small amounts, this may be more cost effective, and offer better terms.
Overdrafts: Authorised overdrafts with your bank may only carry a small fee when paid back quickly. Unauthorised overdrafts can be very expensive, so only authorised overdrafts should be considered as an alternative.
Credit cards: Some credit card companies have grace periods, where as long as you pay back the amount you have charged on the card, there is no interest to be paid. You just pay back the full amount you charged.
Keep in mind that if you use a credit card for a cash advance, there can be additional fees or charges, and the grace period may not apply.
Needless to say of these alternatives, two require having some form of credit, which if someone is in need of a quick small loan, and has bad credit, they may lean towards applying for a payday loan.
As we discussed earlier, while payday loans are fast and easy to qualify for, and are good for someone with no credit or poor credit, they also come at a price, and that price is a high interest rate or APR.
APR stands for annual percentage rate, and is the amount of interest you will pay on a loan for a full 12 month period.
As payday loans are short-term loans, usually 30 days or less, this causes the APR’s to look very high.
Ann example may be you borrow £100 for one (1) year at 40%, which means you would pay back £140.00 at the end of the year; the loan of £100 plus £40 in interest.
With payday loans it becomes more complicated. If a payday loan has an APR of 2000%, this means for every pound you borrow, you pay back 2000p, or £20 for each pound borrowed.
If you borrowed £300 at 2000% APR, if you had the loan for a year you would pay back thousands of pounds, £20 for each pound borrowed or £6,000!
That is why payday loans are a short-term borrowing solution.
However, in some instances a borrower may find themselves struggling to repay the payday loan, and the lender may allow the borrower to “roll” the loan over. This means carrying the loan an extra month, which also means extra fees and interest.
If a loan is rolled over too many times, a borrower may find themselves unable to pay the loan back.
FCA and Changes to Payday Loans
Payday loans and lenders are regulated by the FCA/Financial Conduct Authority, who sets out the terms and rules that payday lenders must abide by if they wish to do business here in the UK.
A few years back, the FCA researched and investigated payday loans, and made some changes to the rules.
The changes were:
* An initial “cap cost” 0.8% per day. The interest and fees charged cannot exceed 0.8% of the loan amount per day.
* Default fees are fixed, and capped at £15. If a borrower defaults on the loan, the fee cannot exceed £15, and the interest and charges on unpaid balances, cannot exceed the initial rate.
* There is a “total cap cost” of 100%. Borrowers will never have to pay back fees and interest more than the amount borrowed.
These changes in regulations were put into place to protect the borrow, and the effect and outcome was that many payday lenders went out of business.
In addition, lenders were required to perform additional affordability checks, to insure the borrower could repay the loan.
Payday Lending in the UK is a Huge Business
Due to the ease, and speed of getting a payday loan, coupled with the fact there is no credit checks, payday loans have become very popular among borrowers.
Between 2006 and 2009, four times as many people took out a payday loan. In 2009 there was £1.2 billion pounds borrowed, with over 4 million loans being granted.
Since that time and the changes made in regulations, payday loans have declined in their usage. The number of loans being approved since 2013 has declined by 42%. This concerns some trade and advocate groups, as they feel it is causing borrowers to have less access to credit.
Even with the changes in payday lending, for those looking for a quick, short-term loan, or those borrowers with bad credit and in need of a loan, payday loans fill that void.
FAQs about Payday Loans
I have bad credit can I get a payday loan?
Yes, as long as you are working have a bank account, and the ability to repay the loan, you can be approved for a payday loan.
I have heard a lot of negative things about payday loans, are they as bad as I read and hear?
Payday loans have received some bad press a few years ago, this in part due to some unethical lenders, who are no longer in the payday loan business. The regulator of lending, the FCA, has set out new rules and regulations for payday lenders to protect consumers and help them better understand how a payday loan operates.
Why are the interest rates so high for a payday loan?
Interest rates are represented by APR’s or annual percentage rate, which is the interest rate and what you pay over a 12 month period. Payday loans are short-term loans, for 30 days or less. When you spread out the interest paid over a 30 day period for a 12 month period, it seems grossly inflated, or high.
Can I use a payday loan for anything I want, like a holiday?
You can use a payday loan for whatever purpose you choose, however, to use one for a holiday may appear as an unwise and not financially prudent use of the loan.
If I apply for a payday loan, how fast can I get one?
Most payday lenders can approve a loan and have the money in your bank account very quickly. Some within an hour.
What happens if I cannot repay my payday loan?
If you’re struggling with repaying your payday loan the first thing to do is to notify the lender. If the problem is serious, you may need to look at your overall financial picture and seek third party help.
My friend had a payday loan and they kept taking money out of his bank account each month.
The repayment process for a payday loan is the use of a continuous payment authority of CPA. You have the right to cancel this at anytime. Once a payday loan is paid in full, there should be no more debits from the borrower’s account.
Does my employer need to be contacted if I take out a payday loan?
No, as long as you have a pay slip or wage statement that verifies you are working and earning, your employer does not need to be contacted.
I heard that if I could not pay back my payday loan I could roll it over another month?
If you cannot repay your payday loan on your next pay period it may be possible to roll it over till you are paid again. There are fees and interest charged for this, but they have been limited by the FCA. If you are struggling to repay the loan, you may want to look at your household budget and finances to see as to why this is happening.