The Beginner’s Guide to Payday Loans

Strapped for cash, but need to MOT the car? A week left to payday and have no food in the fridge? Run out of dosh for childcare, but can only make money if the kids are looked after?The beginner's guide to PayMost people, particularly women in these situations, turn to payday loans out of desperation. It’s a quick and very easy way of getting their hands on some ready money at short notice.

Everyone who uses payday loans usually think that they can – and will – pay the money back within the agreed time.

But be warned! In most cases, people find other demands on their money as soon as they’re paid and so either extend the agreement or, worse, take out another loan.

Making the decision to take out a payday loan should never be taken lightly and there are a few things you need to be aware before signing on the dotted line.

Take heed of our words of wisdom – the most important payday loan rule is this: Only take out a payday loan if you know you’ll be able to pay it back quickly and not put yourself in further debt the following month. Otherwise they can be the trigger that sends you into a debt spiral – fast.

Knowledge is power – especially when it comes to payday loans. So have a read of our guide to help you understand what you might be letting yourself in for…..

Making the decision to take out a payday loan should never be taken lightly. Click To Tweet

The Beginner’s Guide to Payday Loans

What is a Payday Loan?

Payday loans (sometimes called cash advances) are short-term borrowing with a very high rate of interest. Payday loans are short-term solution to immediate, temporary money problems. They give you a fast injection of cash to tide you over until your next pay day.

Some lenders allow you to set the repayment date, but the term is usually less than one month and straight after you’ve been paid.

When payment is due, the loan, plus interest, is taken directly out of your bank account – whether or not you can afford it.

Be especially aware of agreeing to a “Continuous Payment Authority” which allows the lender to keep applying for the money even when there’s not enough in your account, exposing you to additional charges from your bank.

What’s the Damage? 

In January 2015, new rules were brought in to limit the amount that could be charged for a payday loan to £24 per £100 borrowed, providing the loan was taken out over 30 days and repaid on time.

Legislation also states that the total repayment should never be more than twice the amount borrowed.

These figures alone should give you an idea why this form of borrowing is not wise in terms of cost.

Why Are Payday Loans So Attractive?

Payday loans are particularly appealing because they can be applied for, approved and paid into your bank account very quickly – usually within 24 hours – sometimes within minutes.

And you don’t have to jump through all the hoops (like background checks) normally required by lenders to get one.

You can even apply for some payday loans using your smartphone, so they really are very accessible, day or night.

What Are The Typical Repayments?

The interest charged on payday loans is way higher than other forms of credit. Typical APRs for payday loans can be in the thousands because these loans are designed for short term repayments, rather than over a year.

If you can’t make the final repayment, you may well be offered the option to roll the debt over to the following month.

Beware. While everyone loves a lottery rollover, this type of rollover can lead to significantly higher interest and fees, resulting in a much higher repayment.

Here’s a little example to show what you could be in for:

You borrow £300 from a payday lender.

The loan has a representative 1295% APR

You are unable to pay it off straight away so you opt to pay it off over 4 months

The TOTAL amount you will pay back is £722.

So on taking out a small payday loan of £300 you will pay more than twice that amount back! Remember – if you know you can’t afford to repay the loan on time, avoid payday loans at all costs.

Remember – if you know you can’t afford to repay the loan on time, avoid payday loans at all costs.Click To Tweet

Getting a Bad Rep – Do Payday Loans Damage Your Credit Rating?

Unfortunately, despite what lenders would have you believe, taking out a payday loan could harm your credit rating, particularly when it comes to applying for a mortgage.

And once you’ve borrowed and paid the debt back, you’ll be on their hit list for future seductive offers to lure you back to the dark side.

Do You Need A Payday Loan?

Most people who take out payday loans do so as a last resort when they are in are in dire straits and need to get their hands on cash at short notice. We’ve all been there.

But payday loans should really only ever be used if you are absolutely certain that you can pay the full amount of money back, within the time period – and, most importantly, without putting yourself back in the same position the following month.

What Are The Alternatives To Payday Loans?

Authorised overdrafts on current accounts are usually the best alternative to payday loans, as banks are often willing to make a short-term loan on this basis. The fees and interest rates on an overdraft extension will be a lot lower than on a payday loan.

You could also consider a credit card, but most companies charge a fee for cash withdrawals. Again, be careful when using credit cards to plug the hole, you must consider the overall cost, including fees and interest, if you are unable to pay the full amount off within the first month.

Another alternative is to ask if your family or friends can help. Or if you are on income-related benefits you could apply for a budgeting loan for essential items.

If you do not want to ask loved ones for a loan, some employers can offer short term loans, particularly if the reason for borrowing the money is to cover travel to work or childcare.

Unions are also able to arrange credit for their members, so there are often several other options available before considering a payday loan. It really should be a last resort, and not one taken lightly.

Next Steps

Having read this guide to payday loans, please stop and think before you actually apply for one! Ask yourself – can I repay the amount borrowed, plus the fees and interest, in the time frame proposed, without coming up short the following month?

If the answer to the above is no, then steer clear. Consider the alternatives or you may end up on the slippery slope to payday debt.

If you still feel a payday loan is your only option and you are struggling to repay any loans or other credit lines, then you should seek free confidential information from a debt advice agency, such as National Debtline before you do.

And if you have already taken a payday loan, you may be entitled to some refunds. Sara at Debt Camel has put together a fantastic article on how to claim payday loan refunds.

And if you need some help getting out of debt and getting your finances back on track, my eBook: How to Get Out of Debt and Stay Out Once and For All is the best place to start!

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In this guide, I’ll show you EXACTLY how I paid off over £32K of debt in just two years and how to stay out of debt forever.

You will learn how to get out of debt fast even when you are living from paycheck to paycheck on your own – starting now!

Click here to start getting out of debt and get the life you really want!

Always remember that the most difficult part of getting out of debt is getting started!

Your Turn…

What are your experiences with payday loans? Have you ever been so cash-strapped that you took one out? Share with us in the comment box below – we’d love to hear from you.

This post is part of the Debt Management series, you can read all posts in the series here.

Introduction to Managing Your Debt
What is APR: Get the Best out of Your Borrowing
Student Loans: A Guide to University Debt
The Complete Guide to Credit Cards
The Beginner’s Guide to Personal Loans

(Photo Credit: House Buy Fast)

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3 Comments

  1. Brilliant article. In most cases payday loans are usually the only options I have when I am completed strapped of cash. It is sad to read the budgeting loan is available only to people on benefits. What happens to hardworking people in genuine need.

    1. Rosie thank you for taking the time to leave your a comment. It can be really frustrating when there is only one alternative.

      I will suggest you try asking your family and friends in the first instance or even try asking your employer for a short term loan.

  2. Interesting read. I never knew employers could offer short term loans.

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