Payday loans allow people to borrow between £80 and £800 for one month, often without running a credit check. Once your payday arrives, the lender will usually have arranged to take the money directly from your bank account.
Do payday loans fill a much-needed niche in the loans market? Are they only used by chaotic debtors who can't get credit elsewhere or do they offer essential emergency borrowing?
"A payday loan can be the right decision in certain circumstances," explained Tim Moss, loans expert at moneysupermarket.com.
"Yes, without a doubt they are one of the most expensive forms of borrowing. But they are not meant to be used often and they are not the right way to borrow large amounts of money over an extended period.
"Just like you wouldn't take a taxi from Glasgow to London, you wouldn't use a payday loan for casual spending or for a major purchase. It's not meant to be used that way and it will cost far too much."
What are the alternatives to a payday loan?
Because a payday loan is an expensive way of borrowing money, it is worth exploring your other options before you use one. It really is a loan of last resort.
If you have money saved that you can access easily, it's almost always going to be best to use that money rather take out a payday loan.
Even if your overdraft is maxed out, it's worth asking your bank or building society if it could grant you a temporary extension. Whatever you do, don't go over your overdraft limit without authorisation, as this could see you hit with a fee and could even damage your credit rating.
So when is a payday loan right?
You'll probably only want to consider a payday loan if it's the cheapest way for you to borrow in your particular circumstances.
For example, perhaps you have a bill coming in but not enough money in your current account to pay it.
If you use an unauthorised overdraft, you'll be hit with fees and your credit rating could be damaged. If you default on the bill then again your credit rating could be hurt. That means that taking out short-term borrowing could actually be your best bet.
Another situation where a payday loan might be suitable is if you need money for an emergency - perhaps the boiler has broken down or the dog needs an emergency trip to the vet - but you are unable to get credit.
Because some payday loan providers do not run a credit check, they can be used by people who might struggle to get borrowing elsewhere when such an emergency strikes.
How much do payday loans cost?
Payday loans have incredibly high APRs but, because they are not intended to used for more than a month, that annual cost can be a little misleading.
Generally speaking, you'll pay
£25 for every £100 you want to borrow over 31 days. Payday UK, Payday Express and PayDay Financial all charge a typical APR of 1,286.1%.
So, if you borrow £100, you'll repay £125. Borrow £300 and you'll repay £375. It is expensive but, as long as you are able to repay the amount in the allocated time, it isn't as expensive as the APR suggests.
The rule of three
Tim warned: "Payday loans can be useful in some circumstances and can help people avoid overdraft charges or cope with emergency spending.
"However, they should never be considered an everyday way to borrow money - they are simply too expensive.
"Stick to the rule of three: if you use a payday loan more than three times in any one year then it may be worth seeking some help because it suggests you aren't coping financially."
Please note: Any rates or deals mentioned in this article were available at the time of writing. Click on a highlighted product and apply direct.
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