Are you looking to gain access to short term funding due to unforeseen circumstances, such as an unexpected emergency or an unusually high bill to pay one month, in a quick and easy way? You may be considering to take out a payday loan in this scenario. Prior to making an application for one, it is worth taking the time to carefully consider if it is the right option for you. In this guide, we explain everything you need to know about them, to help you on your way to making an informed choice on the matter.
Payday loans explained
Payday loans are specifically designed to be only used on a short-term basis. The loan amounts tend to be smaller than other types of lending, varying anywhere between £100 to £1,000 in total. The reason behind this is that, as the name payday loan indicates, it is only intended to help you until your next payday. The exact amount that you will be able to borrow will be dependent on credit and affordability checks that are carried out by the payday lender during the application process. This is to ensure that you will be able to afford a payday loan, with this not leading you into financial difficulty. As a result, the lender will be looking at things such as your credit history, overall income as well as your monthly expenses to get a broad picture.
Typically, a borrower will take out this kind of loan in order to meet emergency costs, as previously mentioned. For example, this could be something like a broken cooker or a boiler needs repairing in your home, that you would otherwise find particularly difficult to afford via your savings or monthly salary.
When you take out this short-term, high-interest credit option, there will usually need to be an agreement in place with the payday lender as to the day it can take its repayment from your debit card. In most cases, this will be the same day that your next salary payment is due. However, depending on the lender, you may well be able to negotiate to pay over a longer period. This can sometimes be up to six months.
How does it work?
Say someone is earning an average of around £3,000 per month, after rent deductions, this may be reduced to £2,000 for other expenses and cost for the rest of the month. However, their car breaks down and it needs to be fixed immediately to avoid any further potential issues with it occurring. Costing around £400 to repair, the money may not necessarily be available to the requiring party. Therefore, a payday loan amount of £400 could help with this to then be paid at the next payday plus interest.
If payday loans are used correctly and are paid off promptly when it comes to the repayment plan they can help to serve an important purpose, helping to cover unanticipated costs on a short-term basis.
Eligibility criteria for a payday loan
If you are considering getting a payday loan to help you in a financial emergency, then you need to make sure you fit the eligibility criteria beforehand. Whilst this can vary from lender to lender, the typical criteria tend to be as follows:
- You need to be a UK based resident
- You will need to be over the age of 18
- You will need to have your wages paid into your own UK bank account
- You will also need a valid debit card for this UK bank account
- A valid mobile phone and email address will also be required so that the lender can get in contact with you if need be
- You will also not be currently signed to, or anticipate that you will be entering into an Individual Voluntary Arrangement, Debt Management Plan or a debtor entering bankruptcy proceedings.
The cost of payday loans
Since new regulations have been enforced by the city watchdog the Financial Conduct Authority (FCA) there are now price caps on payday loans, helping to make repaying them fairer. This means that the amount of interest and default fees that you can be charged have now been limited, meaning that if you take out a payday loan, you will now never end up paying back more than twice what you had initially borrowed.
For example, say someone takes out a loan for 30 days, they will find that they now pay no more than £24 in fees and charges per £100 that they have borrowed. If repayments are made late, the price cap means that the most that you can be charged in default fees will be £15, plus the interest on the payday loan amount that you borrowed.
Make sure the lender is FCA registered
If you are interested in taking out a payday loan, you should absolutely verify that the payday loan company is legitimate beforehand. This is because adverts for this type of finance tend to be everywhere, especially online, and not all are the real deal. How do you check if they are legitimate? By checking if the payday lender is FCA registered. You can see this by looking online under the Consumer Credit Act at the FCA Consumer Credit Register. If they are not on there, don’t choose them!
Using a Broker to Find a Payday Loan
In addition to the numerous lenders and loan providers out there, online and even on the high street, another tried and tested way to find a loan that works for you and your specific circumstances is using brokers. As with other loans and finance options like bridging loans and others, there are benefits to using payday loan brokers, as opposed to going direct to a lender. However, this will be dependent on your circumstances and preferences:
1) Most brokers can match you with a lender with the lowest rates to your circumstances from a large panel of lenders (source: 1st Class Loans)
2) Most broker sites are now 100% free unless they state otherwise.
3) Higher chance of getting accepted if you have bad credit due to your application getting seen by 40+ lenders instead of just one.
4) Applying through numerous direct lender websites can damage your credit rating unless they use soft search technology.
If you want to take out a payday loan, there are other things you need to consider, such as:
- Make sure you can afford to meet repayments
- Do not get into a cycle of getting multiple payday loans, as this can lead to debt
- Always use a reputable lender
- Make sure you pay on time as this can impact on your credit score
- Avoid paying back over longer periods if possible, as this means more interest that you will have to pay.