Payday loans can offer a quick and easy way to get cash into your bank account, but they can be expensive. If you don’t use them in the right way they can damage your finances.
Inflation is rising and wages are stagnant, so it’s small wonder that more and more people are taking a look at payday loans. With banks being increasingly careful about who they lend to, these easy access loans can be tempting. However, this is one of the most expensive ways to borrow money and if it goes wrong it can seriously harm your finances.
So, is getting a payday loan a good idea and, if so, how can you go about choosing the right one for you?
Why choose payday loans?
The market is full of instant payday loans which give you a decision quickly and can have the money in your account on the same working day. For some people with bad credit payday loans can also seem like the only way to borrow money, but it is important to use them in the right way.
They should only be used to borrow small amounts in the short term. For example, if you’re a week away from payday but face urgent bills which cannot be postponed, a pay day loan might be a good idea – as long as you can pay it off when your paycheque arrives.
The cost of payday loans
Payday loans are expensive. Rates are quoted as an annual percentage rate (APR) which is the amount of interest you would pay over the course of a year. Compared to conventional loans these can be extremely high. You’ll often see rates of 1,000% and more.
However, the APR can be a little misleading. A payday loan should be short term. So, if you took out a £500 loan for three weeks the overall cost might be around £50. To avoid missing a crucial payment, that might seem to be a good deal.
You should get a quote from the provider showing the total cost over the lifetime of the loan. Many providers offer an online calculator which allows you to select how much money you want to borrow and when you want to pay. It can then show you the total cost of a loan.
The other form of cost is fees for late or missed payments. Lenders may charge a fee of up to £15 for a missed payment, so if you do struggle to pay it off, the costs can climb rapidly. Aside from the fee, the loan will continue to accrue interest. The longer you take to pay, the more expensive it becomes.
Taking out a payday loan can also harm your credit rating. When deciding whether to give you a loan or not, the loan provider will perform a credit check. This will leave a footprint on your credit history and could make it more difficult to get a loan in the future.
Payday loan brokers
The rules for payday loans have changed in recent years. In 2014 the FCA introduced new protections for borrowers including a cap on the total amount of interest that can be paid on a loan. However, some lenders are still more reliable than others which is why it can be a good idea to use a payday loan broker.
All brokers are regulated by the FCA and they only work with lenders who are also FCA regulated. As such, you can feel comfortable that the lender is reliable.
Is it the right option for me?
There are, then, plenty of good reasons to use a payday loan. It can help you overcome a cash flow crisis and avoid missing bills. However, the high interest rate means you should be careful and consider alternatives. Above all, only choose a payday loan if you are sure you can afford it.
Ask yourself these questions:
- What do I need the money for? Is this a temporary cash shortage or are you struggling to pay off other loans? It is easy to push yourself further and further into debt.
- Do I fully understand the full cost of the loan? Make sure you know how much you will end up paying and take account of any fees.
- Are other options available? You could speak to friends or family, the bank or look at options such as credit unions.
- Am I certain I can afford the repayments? You need to feel comfortable you can pay off the loan when you get paid and that you won’t be facing the same situation next month.
Don’t go for the first loan you come across. Shop around to get the best deal and make sure you have a full quote for the total cost of the loan. Payday loans can be a good option, but only if you have a clear repayment plan and you will have the money to pay it off quickly.