The Good and Bad Sides of Payday Loans
While payday loans have been popular for a long time in the United States, they are a relatively new service for UK borrowers, and many people aren’t certain just what they are. What with all the argument over whether or not they’re a valuable service or merely a type of legally accepted loan sharking, it’s a good idea for any United Kingdom citizen thinking of applying to realise precisely what they’re signing up for.
Most of us are short of cash nearing the close of the month to one extent or another, and have to economise a bit by trimming back on socialising or other kinds of extra expenditure. This is a totally normal (if annoying!) fact of financial life for most of us who are employed and are paid once a month. Occasionally nevertheless, running out of cash can be more severe than this if there are necessary expenses to be paid such as an unexpected bill or repair cost.
A lot of people utilise the overdraft facility of their bank accounts to allow a bit of breathing space when cash is limited, but in today’s world many people are permanently overdrawn and close to their limits, so this may not be an option.
An auxiliary method of keeping your head above water until your next pay is to utilise a credit card, both for purchases and cash withdrawals. There are numerous difficulties with this, not least the fact that credit cards are an expensive type of finance, and there’s the temptation to to build up a large balance which can have a calamitous effect on your long term financial health.
If neither of the last two options are the right choice for you you, then a payday advance loan might be worth thinking about. Basically, these loans are available to more or less anyone with a bank account and a debit card, and who is employed. When you take one of these loans out, the issuer will transfer the sum you apply for straight into your account, usually inside a day of your application being authorized. During your application you will have given your debit card details, and the lender will use these to automatically repay your loan on your next payday, as well as their fees.
And in that lies one of the essential problems with cash advances – the charges.
This type of credit is ill-famed for being pricy, and punitive APRs of 1000% or even much higher are perfectly normal. These APR figures are perhaps a bit misguiding, as the APR system is designed for credit with a longer repayment period than pay day loans where the term is measured in days rather than years. Nevertheless, payday loans are pretty pricey, with a cost of a quarter of the amount you borrow by and large the going rate.
The next major problem is that paying off your loan and fee is likely to result in you being skint once again at the end of next month, and it’s all too easy to get into an expensive downward spiral of applying for a loan every month – which is when those high interest rates will really bite.
So, is there any point to a pay day loan? Of course, but only really for a real crisis where there is no alternative. If you’re using these loans to pay for your everyday life, then it would be better to analyse your finances and determine where you can save money, or to restructure your debt using a consolidation loan or similar to free up some surplus funds every month.
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