What’s the Deal with Payday Loans?
Unless you can pay back a payday loan on time and in full, you could find the debt very quickly escalating as they are an extremely expensive way to borrow.
How Does A Payday Loan Work?
Payday loans are short-term loans originally designed to tide people over until payday.
The money is paid directly into your bank account, and the original idea was that you repay in full (with interest and charges added to your loan amount) at the end of the month. However, payday loan companies are increasingly offering borrowing over longer periods and providing a facility for people to pay them back in instalments.
Even if you intend to pay it back in full and on time, make sure you are certain you will have enough money at the end of the month to pay back the loan and the interest without leaving yourself short the following month. Otherwise, you could find yourself unable to pay your essential bills and living costs and tempted to take out another payday loan. Falling into this cycle is all too easy, and it’s how people find their payday-loan debt spiralling out of control.
How Much Does A Payday Loan Cost?
Payday loans are governed by rules made by the Financial Conduct Authority, which caps the amount of interest and fees you can be charged. This overall cap means that you will never pay back more than twice what you initially borrowed.
However, over a year the average interest rate (APR) of a payday loan could be up to 1500%. Compare this to the typical APR of 22.8% for a credit card and you can see just how expensive a payday loan is.
What If I Can’t Pay It Back?
Payday lenders can offer you an extension known as a deferral or rollover, or even a further loan. However, FCA rules mean that they can only do this a limited number of times and they must provide you with you an information sheet each time with details of free debt advice providers.
If you roll over a payday loan, you will end up paying much more in interest and fees.
What Are My Other Options?
Unless you are 100% certain you can pay back the loan on time and in full, a payday loan is highly unlikely to be the best option for you.
Even if you have a poor credit rating, you may be able to secure a more cost-effective loan from an alternative lender who can offer you a loan that you repay in instalments with a lower overall cost.
You can also get debt advice from lots of free services across the UK, which can help you put a plan of action in place and feel more in control about your finances.