WHAT ARE PAYDAY LOANS?

WHAT ARE PAYDAY LOANS?

The purpose of a payday loan is fast, easy money to take care of life’s little emergencies. Payday loans are short-term, high-interest loans designed for people who need a quick injection of money before their next payday. Payday loans are intended for a short time frame of two weeks or so, for a modest amount of money usually between £50 and £500. A payday loan is a cash advance secured by a personal cheque or paid by electronic transfer. You obtain one of these loans from a payday lender.

In order to obtain a payday loan, you will in most cases be asked by the lender for a cheque for the amount you would like to borrow with an additional fee, charged for borrowing. The company will give the borrower the amount they wish to borrow, less the fee, and agrees to hold the cheque until the loan is due to be repaid; usually the borrower’s next payday. The lender will cash in the cheque when the loan is due. Alternatively, with the borrowers permission, the lender deposits the amount electronically. Therefore the loan amount is due to be debited the next payday. In the circumstance that you cannot repay your payday loan, the loan becomes extended and the fee accumulates.

The cost of a payday loans is often somewhat ambiguous, largely due to misunderstood interest rates advertised in the media. In general, the fees on payday loans are a percentage of the amount borrowed, although, they can be based on increments of money borrowed, for example the fee may increase over every £50 increment. The borrower is charged an additional fee each time the same loan is extended or “rolled over”. By law, lenders must provide in writing the fixed charge on the loan you have taken out but also the APR. This is also the case for when payday loan companies advertise their services to the public, they must disclose the annual percentage rate (APR) in the small print. The APR is based on a number of factors, including the interest rate and credit costs on the amount that you have borrowed and over what time period. This can be misleading to viewers that don’t understand the concept of APR and make the loans look extremely unappealing and far more expensive than they actually are.

So how expensive actually is a payday loan? Well this all depends on the percentage or fixed fee rates of your lender. Lets say you want to borrow £100 from your lender who wants to charge you 10% of your borrowed amount as a fee. This means you would have to write a cheque for £110 made payable to the lender. When your loan is due for repayment, the lender will cash the cheque and you redeem it by paying the £110. However, if you cannot afford to repay your loan, you will be charged another 10% of your original loan to extend the time period by usually 14 days. This means that you will now be charged a fee of £20 in order to borrow £100. If you repay your payday loan on time, you should have no problems, but if you continue to miss repayments, expensive fees can accumulate.

The main advantage of a payday loan is that it is very simple to acquire one very quickly, unlike many bank loans. As long as you have a bank account and some form of income, almost anyone can have one. Additionally, payday loans can be taken out extremely quickly because of the low qualifying requirements, closely related to their purpose of being very short-term loans. Payday loans can enable people to manage when they have expenses that are due to be paid before their next payday. The alternative to borrowing from a payday loan company may be missing the payment of a bill, which could incur additional charges, being deprived of essentials or getting disconnected from utilities like electricity. It is therefore a very valuable form of credit for people who may not have savings or have access to other forms of credit.


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