Payday loans – The Complete Guide
Whether you’ve weathered the financial crisis or not, there is no doubt that the Credit Crunch still hits households hard. The financial crisis may appear over but families are still reeling from its effects.
Government and financial institutions are quick to impress upon us that there is financial help out there in the form of welfare programmes and financial assistance – yet this support is either not enough or not offered to those with lower incomes or poor credit score.
“If I have a perfect credit score and have never missed a repayment, why on earth did they reject me?”
Does this sound like you?
For many, credit is not offered to everyone, even those with good credit scores. Financial institutions are tightening their lending criteria.
But there is a simpler, more straightforward option.
The rise in alternative finance – payday loans
More than 1 million people are estimated to have used a payday loan as a short term solution to make ends meet and the total amount of loans lent is thought to be around £1.2 billion and growing.
With traditional financial credit sources out of reach for most households, payday loans have become increasingly popular.
But, what exactly is a payday loan?
What is a payday loan?
A payday loan is a temporary solution to borrow a small amount to aid households in meeting their monthly expenses, between their ‘paydays’ – hence the name payday loan.
The idea is that once you receive your next salary, you repay the amount owed to avoid any long-term debt. Think of it as a friend helping you out or your employer providing you an advance on your monthly wages without the social stigma of asking to borrow money.
Typically, payday loans:
- have a smaller denominational value (the amount being borrowed)
- shorter repayment period (2 to 3-week timeframe)
- are repaid in full at the end of the month, usually around your ‘payday’
- can offer repayments in instalments for longer term loans
- are used for expected financial needs
The industry has changed a lot during the last 2 years and the understanding of what a payday loan is has changed with it. Today, the average loan period is 3 months, yet this is still called a payday loan due to the fact these loans are quick and easy to apply for (compared to regular bank loans).
Peachy is one of the few trustworthy providers that continue to offer traditional payday loans.
How a payday loan works
Payday application decisions are usually made instantly, with the loan deposited either on the day or the following working day. The approved application will be counted as an unsecured loan, meaning that it is not tied towards an asset like a house or car, should repayment not be met.
Within a payday loan agreement, there are two parties – the lender and the borrower, each with responsibilities that must be met as part of the signed agreement. Importantly, this is referring to the loan repayments and the agreement to pay the loan interest.
Payment methods can include:
- supplying a post-dated cheque
- a recurring payment facility – standing order or direct debit to avoid late payment charges and additional fees
What you need to know about payday loan charges, fees and repayments
Payday loans are regulated by the Financial Conduct Authority (FCA), designed to protect consumers from unscrupulous lenders and their tactics. The FCA also stipulate that payday lenders provide clear and transparent guidelines and information about their products to consumers.
“Specifically, the FCA ensures that potential borrowers are aware of the costs involved in taking a payday loan.”
Due to payday loans having a short loan period and small amount lent, they have a high Annual Percentage Rate (APR).
Well, simply put on such small amounts over a shorter-term period, this is how payday loan companies earn their income. Furthermore, you are paying for the convenience of receiving cash quickly, without rigorous paperwork like you’d expect with traditional financial institutions.
There are additional charges that you need to be aware of including:
- processing fees
- other associated charges depending on the lender.
Compared to traditional credit sources, these charges have been regarded as expensive. Should you decide a payday loan is for you – always examine the fees involved.
Why should you take out a payday loan?
Typically, financial pressures occur throughout the year and can generally be planned. Yet, even with the best financial planning, household personal finances can go awry – and when households least expect it.
- broken boilers
- paying tax bills in April
- school trips
- medical costs
- car breakdowns
- or worse – a loss of a job and regular income.
“Payday loans can be a source of reassurance during a household financial crisis”
It’s during these circumstances that you may consider a payday loan, to help you bridge the gap between monthly salary payments to pay for these sudden unexpected costs.
You can use them at any time you think they will play a role in helping you balance your monthly budget.
Payday loans, although regulated the same as bank overdrafts and credit cards, are more flexible when it comes to credit assessment. Plus, unlike borrowing money from friends, you don’t have to disclose your financial situation to loved ones and you’ll never have to pawn or sell your own valuables.
“Savvy customers utilise payday loans as a short-term credit option as a viable alternative to traditional finance, that is restricted by tougher regulations”
When not to use payday loans
Payday loans are not a permanent financial or long-term solution, they should only be considered as a temporary measure.
- planned expenses (like rent or mortgage payments)
- repaying existing debt
- never, ever, be used to gamble with in the hope of making more money
Plan ahead, and only use payday loans for life’s little emergencies.
There are several short-term financial solutions for those financial bumps in the road, and payday loans are one option. Should you decide that a payday loan is the only solution viable for your circumstances, ensure you find the right payday loan provider for you – one that is secure, transparent about fees, and responsible in lending you the money in the first place.
Payday loans should always be considered a temporary short-term solution to your financial situation – so do your homework and find the right online solution for you.