Used effectively, payday loans can help you deal with unanticipated expenses such as utility bills, medical fees or repairs to household appliances without the stress of scrambling to put together an emergency fund.
One of the biggest advantages of using a payday loan is that it can provide you with instant, immediate access to cash. Payday loans are also ideal if you can’t qualify for other financing options, such as a business loan or home equity loan.
Since payday loans are usually for small amounts of money (typically, payday loans are for £1,000 or less), they’re also a suitable option for small expenses where a larger loan isn’t a practical option.
In this guide, we’ll explain exactly what payday loans are, as well as the key factors that you should be aware of as a borrower.
What exactly is a payday loan?
Payday loans are short term loans that are designed to help people cover emergency costs, such as repair or medical bills.
As the name suggests, payday loans are often designed to help people survive until their next payday. After the loan is approved, it’s paid out directly into the borrower’s bank account, with a fast turnaround process that makes the loan accessible almost instantly.
Like all loans, payday loans are subject to interest. The total amount of interest you’ll need to pay varies based on the amount you borrow and the term of the loan — most of the time, you can quickly work out the total cost of the loan online using a payday loan calculator.
Most payday loans are made out for a period of 30 days, although longer loans can be made if required. Once the money is loaned out, the borrower can spend it as they need to, whether on a repair or replacement bill or another type of unexpected expense.
How much can you borrow with a payday loan?
The amount you can borrow using a payday loan varies based on several factors. If you’re a first time borrower, you might be limited to £500 as a security precaution.
Other factors that affect the amount you can borrow include your existing credit rating and loan history, your employment status and income, the loan’s affordability assessment and the criteria provided by the lender you choose to apply with.
Because payday loans are unsecured, lenders will need to review your current financial status before granting a loan. If you’re already struggling with your finances and don’t have a reliable source of income, the lender may decline to provide a loan (or only offer a small loan).
Payday loans are processed rapidly after approval in order to provide fast access to cash for borrowers. Most of the time, a short-term payday loan will be wired into your account in just a few minutes after your application is approved.
How much do payday loans cost?
There’s no single interest rate for payday loans, meaning the cost of borrowing can differ from one lender to another.
Most of the time, payday loan interest is expressed in representative APR — a type of interest rate that takes into account all of the costs involved in the loan. This means that what you see quoted is what you’ll pay back, making it easy to compare different payday loan providers.
Because payday loans are designed for the short term, they tend to have higher interest rates than other borrowing options. This makes it important to plan ahead of time before taking out a payday loan, as you’ll want to make all of your installment payments on time.
Some payday loans are also available with daily interest options. Under this scenario, you will pay up to a maximum of 0.8% daily interest on the loan (the limit set by FCA regulations) until the loan is repaid.
For example, this means that the maximum amount of interest you’ll pay over a 30 day period for a loan of £100 is £24.
What happens if you pay back a loan early (or behind schedule)?
Depending on the lender, you might be able to pay back your payday loan early. This can be a good option if you’re able to save money faster than expected, allowing you to pay off the loan and be debt-free ahead of schedule.
Not all lenders allow early repayments. Some may offer the option to pay early but charge an early payment fee, while others may allow you to pay off your loan earlier than scheduled with no additional costs.
While paying back your loan early can be a good thing, it’s important that you don’t fall behind on your loan repayments.
In the event that you’re late on a loan installment, your loan could fall into arrears. When this happens, your loan will continue to be subject to interest, meaning you’ll pay back more than you originally expected to and spend more in total on the loan.
Paying back a loan behind schedule can also negatively affect your credit score, making it a more difficult process to borrow money in the future.
Would you like to learn more about payday loans?
Do you have questions about the payday loan process? From interest rates to fees, borrowing criteria and more, our team of financial experts can answer any of your questions about taking out, repaying and managing a short-term loan.