A payday loan is a short term loan with a high interest rate attached. These loans are often easy to apply for with quick application processes and relaxed checks on applicants, meaning it may be easier for people with a poor credit history or difficult financial circumstances to successfully apply for a payday loan. Because of the nature of these loans and the high interest rates charged, it is extremely important to be positive that you will be able to meet the loan repayments on time, or risk facing severe charges and escalating interest rates.
Although payday loans are designed to be taken out to cover emergency expenses until the end of the month, many people take these loans without really considering the overall costs and without being sure that they will meet the repayments. Lenders often offer ‘rollovers’ to the loan, where they carry the repayment over to the following month with a steep fee attached. If you do take out a payday loan, try to avoid rolling the loan over at all costs, as the fees involved will drastically increase the cost of the loan in the long run, and could leave you with spiralling debts and major financial difficulties.
Why Should I Compare?
If you absolutely must take out a payday loan and have exhausted all other options, try not to rush into a loan with one particular lender. Because of the high APR attached to payday loans, it’s crucial that you compare the different costs of various lenders and understand any fees involved and exactly how much the loan will cost you. If you can compare different APR costs and fees you’ll be able to get a clear sense of what you’ll need to pay back. This will also help you to work out whether or not you can really afford to pay back the loan.
Many payday loan companies now have sliding calculators on their websites to help you work out exactly how much the loan you need will cost you. Try out as many of these as you can to find out the cheapest deal before applying, and seriously consider other options before you take the plunge into debt.
What Should I Compare?
The first thing to compare when looking at payday loans is the APR (annual percentage rate). This will determine what kind of interest rate you can expect to pay on the loan. All payday loan companies have extremely high interest rates compared to other borrowing options, with the potential exception of unauthorised bank overdrafts, but some will be higher than others.
Aside from the APR, you should also check what sort of loan terms the payday lender offers. Many payday loan companies stick with very short term loans, from one week up to one month, but in the competitive market some lenders have introduced longer term loans that can occasionally go up to six months. If you don’t feel that paying the loan back within 30 days is a viable option for you then a longer loan term could be considered, but it’s important to keep in mind that the longer you wait to repay the loan, the more interest will be accrued and the higher the overall repayment amount will be.
The most important thing to check when comparing payday loan options is whether the company is certified or not. Check with the FCA Consumer Credit Register to ensure that the lender has a credit licence. Loan sharks are lenders that operate outside of the FCA to provide quick loan solutions for desperate people in difficult financial circumstances- these lenders are even more high risk than payday lenders and borrowing from them could come with seriously unpleasant consequences.
What Other Options Do I Have?
Even if you take all of the necessary steps to compare payday lenders and find the cheapest loan available on the market, it will still be far more expensive than many other options out there for borrowing. Payday loans can lead to a vicious cycle of debt, which can then be very hard to break out of. Compare all of your available options first to ensure that you’re making the right decision.
So what else is there?
● Use your credit card. Drawing cash in advance on a credit card will still leave you with interest and repayments, but the APR will inevitably be far lower than what you’ll find from a payday loan.
● Get an overdraft. We’re not talking about the unauthorised kind here- those come with hefty fees. Go into your local bank branch, explain your situation and ask for an authorised overdraft extension. Again, this will still come with a substantial APR and will cost you in the long term, but it won’t be as expensive as a payday loan, and your bank is likely to be more trustworthy than a payday lender.
● Join a credit union. Credit unions often have options for people who are struggling financially, and can offer short term loans at capped interest rates. This could be a far cheaper way to borrow, and the credit union can help you to save in the long run after your financial crisis has blown over.
● Ask for help. If you’re struggling with debt and don’t know where to turn, there is always help available. Speak to a debt charity like StepChange and get free, impartial advice instead of turning to payday lenders who will only worsen the problem.