Payday Loans - The Good and the Bad
Payday loans are a long-established form of credit in the USA, but have only recently started to appear in the UK. There is a lot of controversy about whether they are a good or bad thing for consumers, so if you've been tempted to take one out it's best to be sure you know what you're getting into. So firstly, what exactly is a payday loan?
Skint!
Many of us find we're short of cash towards the end of the month, and have to cut back on our spending on things such as social activites. This is normal, and is just part of the monthly financial cycle of most employed people. Sometimes, however, things can be much worse. Maybe an unexpected bill arrives, or you urgently need to spend on a car repair - there are many things that can happen that leave you with simply not enough money to get through the month until your next pay day.
A bank overdraft was the traditional answer to this problem, giving you some flexibility to go into the red in an emergency. Unfortunately, the ease of getting an overdraft means that many people now are financially dependent on it, and are permanently overdrawn towards the end of the month. Extending your overdraft may be an option, but your bank may not agree to this.
Some people will use a credit card to keep them going until they next get paid, but this can work out to be very expensive - and it's tempting to not repay what you've spent, leading to ever higher card account balances, higher repayments, and generally a worse financial situation.
Enter the Payday Loan
It is in this kind of situation that a payday loan, also known as a cash advance, may be worth considering. When you take one out, you give your bank account and debit card details to the lender, who will advance you the amount you ask for direct into your account, usually the next day. On your payday, when you have funds again, the lender will automatically repay the loan from your account using the debit card details you provided, along with whatever charge they make for the service.
Sounds good so far? Well, it's that last few words about a 'charge' that can be a problem, as payday loans are notoriously expensive.
Many cash advance companies will charge a flat fee for their services, often of around £25 per £100 borrowed. This might seem a reasonable price to pay for emergency cash, but when you work out the figures, it can lead to some surprisingly high APR figures, often of well over 1000%. This is because the loan is borrowed over a short period of time, and so the APR figure can be a little misleading. High percentage figures apart, payday loans are still one of the most expensive forms of credit.
The second problem with these loans is that it can be easy to fall into a pattern of taking out a loan every month, in a never ending cycle of needing a loan to fill the money gap caused by repaying the last one plus the charges made for it.
In this kind of situation, it may be time to take a deeper, harder look at your finances and see if something can be done to improve them, such as working out a better budget or taking out a consolidation loan.
Is There Any Good News?
It's not all bad news with payday loans though. They do have the advantage of being quick to arrange, and the approval rates are very high with nearly anyone employed and with a suitable bank account being accepted. They can also be taken out in small amounts rather than saddling yourself with a personal loan debt of hundreds or thousands of pounds which will take a year or more to clear.
So the upshot is that if you need 'cash in a flash', as one marketing slogan has it, then by all means consider applying, but do so with your eyes open to the downsides too.
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