It seems that with petrol costs, food prices and household bills surging since the credit crunch more of us are turning to payday loans to offer a solution. Since September, there has been a 55% increase in the take-up of payday loans as borrowers look to meet their financial obligations with a short-term fix.
However, with typical interest rates in the region of 25% a month - if you borrow £100 you'll pay back £125 - are payday loans really the answer?
What are payday loans and how do they work?
The idea behind payday loans is straightforward - they are a short-term cash loan, sometimes referred to as a cash advance, that provides you with cash until your next payday - whether that is 31 days away or less. Typically you can take out a payday loan for any amount ranging from £80-£800 (though some providers do offer loans up to £1,000) but they tend to be taken for sums less than £200.
The key to payday loans is that they are convenient - in many cases the money will be placed into your account on the same day you apply. So if you need to borrow £200 and are happy to repay £250 on your next payday, then payday loans are fast, efficient and a readily available solution to a short-term cash flow problem.
They can also be a useful borrowing tool if you have a poor credit rating and require a quick cash advance as there is no impact on your credit score. If you can't get credit from your bank and go overdrawn for example, then these loans can offer a welcome alternative - unauthorised overdraft charges can be as high as £90 over the course of a month. All you will usually need to qualify is a full-time job, a bank account and a debit card. It doesn't matter if you are a homeowner or a tenant, although you must be over 18 years old. The payday loan companies will make a judgment about your ability to repay the amount owed and it's important you stick to the repayment schedules and pay the interest due.
If you can do this, then there's certainly no shortage of competition in the market. Payday UK is the largest payday loans lender in the UK and you can borrow any amount from £80-£750 - you'll also get an instant online decision about whether you are accepted or not.
Alternatively, Payday Express is another respected provider having been in business for more than eight years. It offers loans from £80-£800 - you will get an instant approval decision and as long as you have a debit card the money will be transferred into your account on the same day.
Both Payday UK and Payday Express have a 31-day term during which you can repay the cash - both companies also have the same repayment rate - for every £100 you borrow you must pay back an additional £25. As with the majority of lenders there are no hidden costs and no administration fees.
So what is the problem with payday loans?
Because payday loans are an expensive way to borrow, the cost escalates hugely if you are unable to repay the debt on time.
Failure to pay the money back within the agreed period will lead to an additional charge - usually £25 for every £100.
In many respects, payday loans are like taxis: for a short journey, taxis are convenient and often worth the expense. However, for a longer journey there are much cheaper ways to travel.
So what are the alternatives?
If you need to borrow a small amount but over a longer time period than 31 days, then look for a product that allows you to spread the repayments. For example, the Provident Personal Credit Loan allows you to borrow amounts ranging from £50-£500 at a typical rate of 183.2%APR. That means that if you borrow £300 you can make 56 weekly repayments of £9 for a total amount repayable of £504.
There are cheaper ways of borrowing however. What about an overdraft? If you don't have an overdraft facility, contact your bank and see if you can set one up. If you are regularly overdrawn it may even be worth switching current account in order to benefit from a cheaper deal. Alliance & Leicester offers a 12-month interest-free overdraft on both its Premier and Premier Direct current accounts.
Interest-free credit cards are also worth considering. The Capital One Platinum, available exclusively through Moneysupermarket, gives you 0% on purchases and balance transfers until May 1, 2009. This gives you nearly 12 months to chip away at the cost of the item you need to buy - you just need to trust yourself not to spend beyond your means. Alternatively, the Halifax One Online Special offers a 10-month interest-free period on purchases and balance transfers, so this could be a good option if you have existing debts to repay as well a spending requirement. For more 0% purchase deals visit our credit cards section and use the Smart Search tool to find deals you may qualify for based on your credit score.
Another option to a payday loan, particularly if you want to borrow a large amount, is a standard personal loan. The deals you qualify for will depend on your credit rating so as with credit cards, it is worth using our Smart Search facility to identify which these are. However, if you have a good credit score, Barclaycard loan is offering a rate of 7.3% on a £5,000 loan repayable over three years, while those with a 'fair' credit score could get 17.9% from UCC Loans.
That's not to say that payday loans should be ruled out altogether - but they should only be used for select purposes. If you need cash instantly, need to pay off a more pressing debt or if something unexpected happens, such as a broken boiler, then a payday loan could provide the quick cash solution you need. But, only take them out from authorised providers such as those featured in our payday loans section.
Have your say: Have you used a payday loan to overcome a short-term cash flow problem or maybe you've never heard of them before? Are your financial problems more severe than that and you don't know what to do? Whether you need advice or have advice to give, visit our forum and share your views with other members.
Disclaimer: Please note that any rates or deals mentioned in this article were available at the time of writing.
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