Guide to payday loans - Loans - Guides - Moneyfacts


Guide to payday loans

Guide to payday loans

Category: Loans

Updated: 12/08/2016
First Published: 12/08/2016

Payday loans are a very expensive way to borrow money.

If you are in the situation where you feel you might need to take one out, it's worth reading this guide to make sure you've considered all the options.

In this guide…

What is a payday loan?

A payday loan can be thought of as a loan that acts as an advance on your salary. They differ from the traditional personal loan you get from a bank because they are:

  • for a much shorter term – usually less than a month
  • for smaller amounts – usually anything between £75 and £1,000

Traditionally, payday loans were offered by cheque cashing businesses as an additional service, but more recently a proliferation of online lenders have emerged that has made it easier than ever to get one. However, the big downside is the cost of borrowing this way.

The APR on a payday loan can be several thousand percent.

While it' s worth remembering that an APR is designed to reflect the cost of borrowing over a year(something that a payday loan is not designed for), it does highlight just how expensive this method of borrowing is.

But in contrast to other forms of borrowing, payday loans can be quicker and more convenient to apply for. Money can be in your account within hours, with a minimal application process.

In addition, several websites have "sliders" that let you see how much you repay for borrowing, so you can clearly see how much you'd have to pay back. Others give you the flexibility to choose the repayment term, too, and allow you to pay back what you borrow early without extra charge.

New payday loan regulations

Because of the very high rates, and the target market for this type of loan, strict new rules have been brought in to help protect customers.

Payday lenders are now capped at charging a customer no more than 100% of the amount borrowed in interest, fees and charges. Lenders are now also more limited in how many times they can access a borrower's bank account to repay an outstanding loan.

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Should you take out a payday loan?

A payday loan may be suitable for you if you are hit with a sudden one-off expense, and can' t find the money quick enough anywhere else.

But as we said previously, a payday loan is an extraordinarily expensive way to borrow money, so should only be seen as a very last resort.

Needing to borrow from a payday lender can also be symptomatic of a larger problem with your finances. At the less extreme end it signifies that you haven't enough saved to cover life's little emergencies (our guide to saving an emergency fund can help with this), but in more extreme cases, it could be the result of a debt problem that a payday loan could make much worse.

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Have you considered the alternatives?

Payday loans are marketed on convenience (you can usually apply online and get your money the same day). However, the high APRs mean that they should be thought of as a last resort, rather than as an easy option.

Consider these alternatives:

  • Borrow from family and friends. You could offer to pay them back the money with interest or with a small gift. A bottle of wine in "interest" will work out far less expensive than a loan from a payday lender.
  • Borrow on your credit card. If you have a credit card already, with a limit to spare, consider spending on your plastic rather than taking out a payday loan. When you use your card to pay for goods or services you generally get a 56 day interest-free 'grace' period in which to repay. However, this doesn't apply to cash withdrawals.
  • Speak to your bank. While it might feel less embarrassing and more convenient to apply online for a payday loan than talking to your bank, if it saves you money you should still try. Your bank may be able to temporarily extend your agreed overdraft limit, for example.
  • If you're a member, see if your credit union can help. Some credit unions can offer a short-term loan which will have a far lower interest rate. However, you'll need to be a member of the credit union already, and possibly have some savings with it too.

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If you have to take out a payday loan, make sure…

  • You've considered all the alternatives
  • You don't just settle for the first lender.
    Get quotes from several lenders before
    making a decision.
  • If you're considering a payday loan
    because of crippling debts, speak to a free
    debt counsellor from a charity
    (such as the StepChange Debt Charity
    or Citizen's Advice) before
    taking it out.
  • You will be able to comfortably repay
    your loan when you get paid, without
    having to resort to borrowing the following

Make sure that payday loans don't become a habit:

  • Open a savings account and start building an emergency fund
  • Consider joining your local credit union

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What next?

Compare personal loans

Credit union guide

8 steps to getting rid of debt - this guide aims to give tips on how to get yourself debt free; or at the very least, point you in the direction of people who can help...

Step Change Debt Charity - for free debt management advice

Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.

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