More people than ever before are visiting the moneysupermarket.com payday loans page, to search for short-term borrowing ahead of their next pay cheque.
Over the last 12 months, the number of visitors looking at this kind of personal borrowing has risen by 166% - so there’s clearly a demand.
However, payday loans are pretty pricey and can be seen as a last-resort loan, used only by those skating close to the edge of financial chaos.
Is that true? We asked the moneysupermarket.com loans expert Tim Moss for his thoughts.
“No one should take out a payday loan lightly – they’re the most expensive form of borrowing,” he explained.
“But I do think they have a role to play. Like any financial product, they’re open to mis-use but that doesn’t mean they don’t serve a purpose.
“I think that if you’re using a payday loan more than three times a year then you need to stop and take a good look at your finances, because something isn’t working.”
When is a payday loan right for me?
Payday loans should not be used for casual purchases because they are so expensive.
There are circumstances, though, where they can really help out. For example, if your phone bill is much bigger than you had expected, you could find you’re left with a choice of defaulting on the debt, being charged for going beyond your overdraft limit or taking out short-term borrowing.
As long as you are confident you can afford to repay it the next month, a payday loan is preferable to failing to pay and adding a black mark to your credit record.
Perhaps you need a mechanic to look at your car but the money won’t be in your account for another two weeks? There are situations where payday loans are helpful.
“Explore all your other options first,” suggested Tim. “Perhaps your bank will temporarily extend your overdraft, or maybe family could help tide you over to the end of the month.
“If not, a payday loan could be the answer.”
What is a payday loan?
A payday loan is a high-interest form of convenience borrowing – money lent to cover an expense until your next pay cheque comes through. People can typically borrow between £80 and £800 for up to 31 days.
Once your payday rolls around, the lender will normally take the money directly from your bank account.
You should never take out a payday loan if you can’t afford to repay it. If you are unable to pay, the company might agree to charge you the interest that month and roll the debt over to the next one – but then you’d pay the interest again.
That could become very expensive very quickly.
Failure to pay will normally mean the debt is quickly passed to a debt collector.
How much do they cost?
One of the reasons payday loans are so notorious is that the annual percentage rate (APR) you pay – the interest over one year – is huge.
Whereas on a normal credit card you might pay 16% on your borrowing, with a payday loan it could be more like 1300%. However, that doesn’t quite show the full picture.
APR refers to the amount you’d pay over a year – and lenders are legally obliged to provide it whenever they are advertising their rates.
Payday loans are extremely costly but they are meant to be minor, short-term borrowing. £100 for 31 days could cost you £125. The typical APR would be 1,286.1%.
Tim added: “There’s an analogy that might help. A taxi is expensive but convenient. You might hop in one for a short journey – but you wouldn’t use one to travel from Manchester to London.”
Will I have a credit check?
Credit checks can temporarily reduce a person’s rating, because lenders get nervous when someone applies for more than one loan or credit card in a short period.
Some payday loan companies will conduct a credit check and others won’t – but you have to give permission for them to do so. If you don’t want your credit rating to be affected, look for a lender that states they will not conduct a search.
Of course, if a lender does check your credit rating then they will also report on your reliability. That means using a payday loan properly and repaying it promptly could, in fact, boost your score.
Of course, failure to repay will damage your rating, so make sure you can repay the money you borrow on time.
What’s on offer?
As with any financial product, there are a range of providers and you should compare them to find the best deal for you.
Payday UK lends between £80 and £750 for 31 days, at an APR of 1,286.1%. That means that to borrow £300 for one month, you’d pay a total of £375. To qualify for a loan, you have to be over 18, in full-time work and earning more than £750 a month.
Another option is Payday Express, which lends up to £800 for 31 days and charges the same APR as Payday UK. It does check your credit rating, which will show up on your credit score, but a poor credit score doesn’t necessarily mean you won’t qualify for the borrowing.
Payday Financial also charges £25 for every £100 borrowed over 31 days, but it doesn’t provide the money itself. Instead, it matches applicants with independent loan providers. That means it’s vital you carefully read any small print you receive, to make sure you understand exactly what you’re agreeing to.
Payday loans are meant to bridge the gap until payday; they shouldn’t be used as a long-term solution.
If you’re struggling to manage your money effectively, read our article ‘What to do if you’re in debt’ or take a look at National Debtline’s article ‘Golden rules for dealing with debt’.
Don’t use a payday loan if you are not going to be able to afford to repay it – that’s just postponing the inevitable and will add considerably to your borrowing.
Please note: Any rates or deals mentioned in this article were available at the time of writing. Products or companies underlined can be applied for directly.