What Are Payday Loans?
Put simply, payday loans are a type of short term loan you can take out for emergency expenses. When you don’t fully understand what they are, and the ins and outs of them, they can seem quite daunting. However, it is important to fully understand what they are and how they work so you can make an informed decision on whether or not they are the right option for you.
Short Term Loans
Payday loans are a form of short term loan which usually lasts from 1 day to 30 days, although some providers extend this to 36 days, such as cashasap.co.uk, among others. As the name might suggest, payday loans are intended to allow you to borrow money which is then paid off in full after your next payday (hence the one month loan period). Different lenders allow you to borrow different amounts, often increasing for returning customers, ranging from £100 to £1,000.
Why Payday Loans Are Useful
There are some situations in which a payday loan can be extremely useful.
The biggest advantage of payday loans is the speed at which cash is available. Most lenders offer same day bank transfers so a borrower can have cash within hours of applying. This is by far the biggest appeal for a loan with such high interest rates compared to longer term loans as it provides an immediate solution to an unforeseen cost.
It’s worth noting that payday loans should only be used for emergency financial situations, such as an unforeseen expense for which you wouldn’t have known to budget, but needs sorting immediately. For example, if your boiler breaks in the middle of winter, it is important to get this fixed as soon as possible.
When deciding to get a payday loan you should always make sure you are positive that you will be able to pay back the full amount on your next payday. If you know you will be able to afford the repayment and you need money fast, then getting a payday loan could be the right decision for you.
Why People Avoid Them
Payday loans have a notoriously high APR, due to their fast turn around and simple application process. When you get a payday loan you will be paying back a significant amount more than what you borrowed, with APR on payday loans going up to 1,500%. For this reason, people avoid payday loans if they can, preventing them from having to pay back a considerable amount more than what they originally borrowed.
However, the APR represents how much the loan would cost hypothetically over a year. Because payday loans span such a short period, it’s often more valuable to look at the actual payback amount to understand the cost of a loan, rather than at the APR.
Debt, Planning, & Repayments
Due to the high APR, borrowers should be extremely wary of becoming reliant on payday loans, which can lead to a debt cycle. It is easy to get caught into a repeat cycle of rolling the loan over for another few weeks or taking out a new payday loan immediately after paying back the previous one.
For example, a car repair emergency comes up and you need to borrow money to pay for it. You use a payday loan and when payday comes around you pay it off, but don’t have enough money left for all your normal monthly spendings. This leads to you having to extend the loan or take out another loan, which then leaves you with another expense to pay at a later date.
It’s vital that anyone choosing to take a payday loan calculates whether they can afford to make repayments, budgeting to take into account the cost of the loan not just in the month you take out the loan, but the following few months. The lender also has a responsibility and will have affordability criteria that someone must meet before they will lend to them.
Although instant cash can be extremely useful, it is important that a borrower makes sure he can afford the loan before applying. This method of borrowing money can become extremely expensive if you become reliant, but extremely useful if you budget correctly.