Advice
If you are in financial difficulty and cannot afford to repay, or think that you are likely to need further loans in subsequent months, we recommend you seek advice from one of the free debt advice charities such as Citizens Advice, Consumer Credit Counselling Service (CCCS) or a specialist debt company.
Family finances are under pressure, so it’s perhaps no surprise that there has been a big increase in demand for so-called payday loans. The number of people who have visited the section on moneysupermarket’s website has doubled since the start of 2011.
Companies such as Payday UK, Quickcash and Payday Express all offer almost instant access to a short-term loan. Customers can sometimes get their hands on the cash within an hour.
Payday loans can certainly be a handy way to plug a gap in your budget. But they come with a wealth warning. If you do not understand how the loan works, or you do not pay it off in time, the debt can rapidly spiral out of control. And the thing that initially appears to be a short-term solution can easily become a long-term headache.
Here we look at what payday loans are and who they suit…
What is a payday loan?
A payday loan is a short-term loan, intended to bridge the gap if you run out of money before your next pay cheque – a bit like a cash advance on your salary. You can usually borrow between £100 and £500 and the money must normally be paid back within 31 days.
You can usually apply for a payday loan online and a decision will be almost instant, so you can get hold of the money fast.
To qualify for a payday loan, you must have a current account and a regular income. Lenders will almost certainly check your employment details, but most do not run a full credit check, so a bad credit record will not necessarily affect your application.
Unlike secured loans, payday loans are also open to tenants as there is no stipulation that you own your home.
The eligibility criteria might sound relaxed, but not every applicant is successful. In fact, some firms claim they turn down between 70% and 80% of applications.
How much will I pay?
The annual interest rates on payday loans can look quite frightening. Payday UK, for example, charges an annual percentage rate of 1286.2%. But remember that the loan should last no longer than a month, so it’s perhaps more useful to calculate the monthly charge. If you borrowed £100 you would pay back a total of £125, as long as you cleared the debt within a month.
In some cases, a payday loan can work out cheaper than interest incurred on an overdraft or the cost of falling behind on a credit card payment.
But the debt can quickly spiral out of control if you do not pay off the loan at the end of the term. Most firms will let you roll the debt over, but you then pay interest on the total amount you owe – so you would pay interest on, say, £125 instead of £100. If you also top up the loan, it will not be long before you are seriously in the red and possibly in financial difficulty.
Use moneysupermarket.com’s payday loans comparison tool to compare rates and to investigate the terms and conditions.
Is a payday loan right for me?
The loans can also plug an emergency gap in your finances, perhaps if your boiler breaks down or you have to carry out another urgent repair.
Payday loans can offer a lifeline to the self-employed or owners of small businesses who might need some instant cash to pay an invoice.
But you should only consider a payday loan if you can clear the debt within a month. If you need to borrow money over a longer period, you should look at alternative sources of credit. Think of a payday loan like a taxi: most of us jump in a cab from time to time but it is unlikely to be our main mode of transport.
You should also avoid payday loans if you are suffering from a chronic debt problem, as they will only make the situation worse.
Are there any alternatives?
If you need quick access to short term credit, there are alternatives to payday loans. Most current accounts offer an overdraft facility, which could tide you over until payday. Always contact your bank to arrange an overdraft, because charges and fees are often higher if you slip into the red without permission.
If you regularly run out of money towards the end of the month, check the overdraft details of your current account. Charges vary considerably, so you might be better switching to a better deal.
A credit card is another way to plug a short-term gap in your finances. Most credit cards offer an interest-free period of up to 56 days. So you will not be charged any interest if you repay the balance in full by the date given on your monthly statement.
The average credit card rate is around 17%, although there are numerous 0% introductory offers. If you anticipate a cash-flow problem, a 0% deal could be a great low-cost borrowing option.
Another alternative source of short-term credit is your local Credit Union. These small-scale financial organisations, of which there are hundreds throughout the UK, typically offer loans with interest rates below 15%
To read about specific payday loans providers have a look at the following guide pages: Wonga, TxtLoan, QuickQuid, Minicredit, 247Moneybox, Pounds Till Payday and Swift Sterling.
