If you’re considering loans but are worried about what you might qualify for, or you already know you don’t qualify for traditional credit, then payday loans are an option you can consider. Like most loans, they require a repayment, but that’s where the similarities end. This is mostly due to the fact that payday lenders are not banks, and while payday loans are somewhat regulated, it’s a completely different set of rules that govern their actions. That’s because these loans were intended to fill a gap in the lending community that traditional banks and lenders were not interested in servicing due to the high chance of borrowers defaulting.
This is why the payday loan was created. It was designed to be a short-term loan that had a very high cost. That cost was a direct reflection of the risk and actual issuance costs a lender was taking on in assigning an unsecured small value loan to a relatively unknown borrower. Below we’ll discuss how payday loans work, what you should consider before taking one out, and some alternatives to payday loans you might not have considered.
How Payday Loans Work:
1. The loans are issued on the assumption that a person is paid every two weeks (14 days), and that they will make repayment by their next payday. Because of this, loan terms are almost always for 14 days.
2. When the loan repayment date arrives, the money is directly debited from your bank account, according to the check or bank information you will have been required to leave with the lender. This guarantees payment of the agreed loan amount, any charges or fees, and the loan interest. That interest is capped at 0.8% interest per day.
3. In the event you do not repay the loan on time, additional fees can be charged, but new regulations limit the total interest that can be charged to 100% of the loan value.
When You Should Consider A Payday Loan:
1. When you do not have another option, and absolutely need the money you plan to borrow, you might consider a payday loan. However, there are almost always other options available too.
2. If you are positive you can repay the loan amount, then a payday loan is an option. Just keep in mind that if you need the money for more than one month, there are less expensive loan options you could consider.
What To Consider Before Taking Out A Payday Loan:
1. Make sure you know what the extra money you are borrowing is going to cost.
2. Check your budget to be sure you will have enough money left for necessary expenses like food and transport after paying back your payday loan.
3. Consider your financial snapshot, and if you’ve taken out payday loans in the past. If you have previously used payday loans, then you might want to consider the alternatives discussed below.
Alternatives Are There To Payday Loans:
1. Family and Friends: If you need to borrow money, you can always ask family and friends. While this may seem like an unpleasant task, keep in mind that it should be a bit unpleasant. You should honestly be able to tell them that you need the money for a real need and not a personal or social expense that could wait. If you aren’t borrowing for something legitimate, it’s probably a bad idea to ask friends and family. It’s also probably a bad idea to be borrowing money from a payday lender for that expense too.
2. Ask Your Employer: Many times your employer will be in a position to offer you a pay advance. Since most employers hold a week or more of pay you can explain to them why you need an advance, and often they will issue you an advance. Other times you may be able to work a little more and earn a little extra, depending on your job. Again, if you aren’t comfortable explaining what the money is for, it’s a good indication that you should probably not be borrowing to cover the expense.
3. Use an Overdraft: If you have an overdraft account, then use it to cover your expenses. Just keep in mind that your overdraft charges can be outrageous (more than payday lender fees in many banks). If you aren’t comfortable paying those fees, then it’s also not a good idea to use your overdraft line of credit.
4. Social Fund Loans: If you are living on social funds or claiming benefits, and you desperately need to borrow money, you may qualify for an interest free loan from the Social Fund. To get started, enter your postcode in the Social Fund website to find your local office. Then contact them directly to discuss what options are available to you. Just like the other alternatives above, if you aren’t comfortable discussing the loan with them, you probably shouldn’t be making your planned purchase.
In summary, payday loans are a great way to get quick cash for an immediate need you might not otherwise be able to meet. However, there are many alternatives you can and should consider before getting a payday loan. Perhaps more important than those considerations is the reason you’re seeking a loan. If you genuinely need the money, then you’ll be much more inclined to ask someone for help. However, if you don’t genuinely need the money and will instead use it for social needs, you’ll be less likely to seek help from those you know. After all, you can’t really beg a friend to loan you money and then show up in a pub or club the next night.