Payday loans can give you enough money to tide you over till your next pay cheque clears, but at great cost. We look at whether it’s ever worth taking one out, and if so, how to find the one that'll give you the cheapest cash.
What is a payday loan?
Payday loans are essentially short-term loans, so-called because they are designed to give you a little extra to tide you over till your next payday. Typically you’ll be able to borrow however much you would normally get from your wages on a monthly basis up to £1,000. The loan is intended to give you enough to get by until your payday rolls around, at which point you pay the money back.
The growing popularity of payday loans is largely due to the fact that most companies will grant the loan without requiring you to have good credit, and that after applying for the loan the funds can usually be in your bank by the end of the day – making the whole process quick and simple. All you generally need to qualify for a payday loan is to be over 18 and to have a regular monthly employer’s payment going into your bank.
As such payday loans can be very tempting for those who need to temporarily top up their bank funds – who can resist the appeal of instant money appearing in their account, with no fuss?
However, while there may be minimum fuss, there are plenty of strings attached that could very easily land you in hot water.
What’s the catch?
So far payday loans sound straightforward and relatively harmless, but there are a number of significant things you’ll need to be aware of if you are considering applying for one.
First, the rate of interest applied to your borrowing will be astronomical compared to almost any other kind of borrowing. For every £100 you borrow you’re likely to be charged around £25, which equates to over 1,000% APR (extrapolated from 25% for just one month).
Even the most uncompetitive credit cards charge no more than 30% APR, while a competitive personal loan is likely to charge you around 10% APR – making the thousand-percent APR of a payday loan frankly ludicrous in comparison.
The second big drawback of taking out a payday loan is how dangerously easy it is to roll your loan over from one month to the next, and by doing so increase the amount repayable considerably. For example you might take out a loan of £1,000, which with interest added could mean you need to repay £1,250 on your next payday (assuming £25 is charged per £100).
When you get to payday you may not have enough funds to cover this repayment in full, in which case it’s easy to simply roll your loan over to the next month. But by your next payday you’ll owe even more on your initial £1,000 borrowing, and the amount repayable can quickly spiral into a debt you can’t deal with.
Finally, it’s worth noting that if you are in a position where you are considering a payday loan it’s likely that you’re living beyond your means or are in debt already – meaning that taking out a payday loan with a high interest rate will be even more detrimental to your financial health.
Payday loans are unlikely to be the best option for those who are in need of some extra money, and there are several other alternatives available which should be considered first.
What are the alternatives?
First of all if you have several debts or are finding it hard to make your money last from one month to the next, it may be worth getting in touch with people who can help – such as the Citizens Advice Bureau, who can give comprehensive help if you’re struggling to make ends meet.
Otherwise if you simply need to borrow a little extra for whatever reason, you can do so at a competitive price by using a 0% balance transfer or purchases credit card, and paying the balance back as soon as you can, or by getting a personal loan which could have a rate as low as 9%.
If you need money quickly you could also call your bank and either ask for a temporary extension on your overdraft, or for an overdraft buffer to be added to your account. You are likely to be charged a fee for this but it will be significantly less than you would ever pay on a payday loan.
So are payday loans ever worthwhile?
In most cases payday loans are unlikely to represent an effective solution to your money worries, and should be avoided, if for no other reason than the horrendous rates of interest you’ll be charged on what you borrow. Needing a little extra to get you to payday can never really justify paying a rate that’s upwards of 1,000% APR, however badly you need the money.
However, there are of course possible circumstances where you have exhausted your other options and a payday loan is your only alternative. In such cases you should make sure you are at least getting the best deal you can in the context of a payday loan by shopping around and finding the lowest APR available.
Only borrow an amount that you will be able to pay back come payday. Most importantly, pay the loan back as soon as you can to avoid getting into the sticky situation where your expensive loan is being rolled from one month to the next.
