Payday Loans – A Guide to Payday Loans

In this uncertain economic climate it is becoming increasingly difficult for both businesses and members of the public to borrow money.  Before the global financial crisis banks were willing to lend money to members of the public whose credit ratings were subprime to say the least.  The world has now changed and the large financial institutions are far more wary than they used to be when it comes to lending money.  For those whose credit ratings are less than perfect it can be exceedingly difficult to borrow money from a bank no matter what the circumstances.  However, there are alternatives banks even if you have bad credit and you are looking for a loan.

One form of lending which has become notorious in the last two years comes in the form of a payday loan.  Payday loans are short term loans which are available to people even if they have a poor credit rating.  Payday lenders often charge a far higher level of interest in comparison to a standard bank loan. This is because a payday lender is taking on a higher level of risk when they agree to lend to people with bad credit. Some payday loan companies have been known to charge over 16,000% representative APR and it is important to be aware of extortionate interest rates.

Part of the reason for the notoriety of payday loans is due to the lack of regulation which exists in this particular quarter of the lending industry.  While banks and other creditors are strictly regulated by the Financial Services Authority there is little regulation which needs to be adhered to by companies who offer payday loans.  The Office of Fair Trading is currently investigating the way in which payday loan companies do business and whether or not their tactics for attracting borrowers are ethical.

Critics of the payday loan industry complain that payday lenders are a plague upon those at the bottom of society who are in need and most likely to be taken advantage of.  However, at a time where loans are difficult to come by and any blight on your credit history will mean rejection from a bank there are few alternatives to the creditors who can provide loans for people with bad credit.  Some members of Parliament are currently claiming that one way to avoid borrowers falling into spiralling debt would be to prevent lenders from allowing loans to roll over month after month when debts fail to be paid.  Labour MP Adrian Bailey has stated that the payday loans industry is “opaque and poorly regulated” and this is held to be the general consensus among both the opposition and many in government.  However, there are also those in government who believe that more regulation may drive those who are most desperate into the arms of illegal loan sharks who cannot be regulated.

In theory payday loans should only be withdrawn for a short term period.  Borrowing for a period of one week to one month is encouraged by most payday lenders. If payday loans are borrowed for the recommended period of time (between one week and one month) then the amount of interest which will accumulate and needs to pay back should be manageable.  In order to work out how expensive payday loans can be it is often recommended that you check the representative APR on any loan which you are interested in.  APR stands for annual percentage rate and is used to gauge how much interest will accumulate over the course of a year when you borrow money.  When looking at financial products such as payday loans or credit cards the rate of interest which one person may have to pay is likely to be different to that of another borrower. This depends on different personal circumstances such as employment, income, or credit history.  In the past a typical example of interest accumulated on a loan was represented by the APR of a loan that 66% of customers would have if they replied to that advert, this has now been reduced to 51% of customers. Representative APR must also include extra fees which may be incurred when money is borrowed. Below is an example of the way in which APR can be calculated:

If a payday loan company advertises that you can borrow £100 for 28 days, and the total charge for credit is £25. Interest is fixed at a rate of £25 per £100 loan. Transfer fee (included in total charge for credit) is £5 and the total repayable is £130 then their representative APR will work out at 1733.5%.

The most straightforward way to work out whether or not payday loans are right for you is to work out precisely how much you need to borrow and keep it to the bare minimum. Next work out how long you need to borrow the money for. Finally, find out how much money you will need to pay the loan company when the term of your loan comes to an end. Particularly in the case of payday loans it is essential that you pay back the loan at the allotted time. This is because many payday loan companies have expensive penalty fees which are awarded to borrowers who fail to pay back the money which they owe on time. Some loan companies may allow a loan to roll over at the end of a month if you are unable to pay. However, it is unadvisable to allow this to happen as the longer you borrow for the more expensive your loan will become and extra fees are likely to be incurred.

There are four main places where payday loans can be obtained. High street shops such as The Money Shop which has branches all over the UK can offer small loans in store. However, more commonly borrowers are applying for payday loans online. It is worth being aware that not all websites offering payday loans online are necessarily payday loan lenders.

Some websites offering payday loans are likely to be payday loan brokers.  This means that they will take your information and refer it to a panel of different lenders who will then decide whether or not to accept you for a loan.  This may have its advantages if you cannot find a lender yourself but payday loan brokers often charge an extra fee for finding the loans and they are even less regulated than the payday loan lenders.

There will always be payday loan lenders with websites from which you can obtain payday loans.  These sites ought to clarify exactly how much you should expect to pay back on the amount that you borrow but make sure that there are no hidden charges. On any website on which you apply for a payday loan be sure to read all of the terms and conditions as these will reveal any extra payments or fees which could arise.

Finally, it is always worth shopping around when looking for any type of financial product, but it is especially important when it comes to payday loans.  Payday loan companies are all in competition with each other and while many will claim to have great rates there are very few which actually do.  One way of comparing payday loan companies is by using financial price comparison websites such as Which Way to Pay.  These websites should list appropriate lenders and brokers and provide the necessary detail which you can use to find the best lender.  Be sure to look at the representative APR and how much you are likely to pay back per hundred pounds as these amounts should give a good indication as to the expense of the loan.

Payday loans are not necessarily the only option if you have a poor credit rating and you are still in need of a loan.  There are loans available to people whose credit histories are less than perfect which are sometimes called bad credit loans.  These loans are often secured against property or possessions which you may own.  While this means that you may incur a larger risk when borrowing than you would with a payday loan the interest rates on bad credit loans tend not to be as high.  Bad credit loans are usually obtained for longer terms than payday loans and it is often possible to borrow for periods between two months and two years though this may vary.  The amount of money which you can borrow with a bad credit loan also varies and some companies can lend up to £20,000 but remember that most of these loans are secured against your home so make sure that you can afford to borrow as you risk losing your home if loan repayments are not met on time.

Not all bad credit loans are secured against particular possessions and this type of loan is not only aimed at people with bad credit. The interest on bad credit loans may be higher than that of a bank but if you have a good credit history you may find that the rates of interest will not be particularly high. That is because these loans are not just designed for people with bad credit. At a time when banks are refusing to lend to people with event the best of credit scores loans which were previously designed for people with bad credit are now available to all and can be tailored for your specific needs.

When searching for bad credit loans the advice is very similar to the search for payday loans. Shop around and make sure that you always know exactly what you will have to pay back over the loan period. Always read the terms and conditions and do not borrow anything that you will not be able to afford to pay back in the future.