Payday Loans Explained
Payday loans came over to the UK from America and have been here for quite a few years now. The number of people who use them has increased from just over 1,200,000 in 2006 to just over 4 million in 2010. Some experts also believe that their uptake will triple again over the next three years, mainly as a result of the tightening of criteria by the banks, and the high levels of personal debt in the UK.
A pay day loan is basically a facility offered by a lender that enables you to borrow a relatively small amount of cash for a short period of time, the idea being that it is paid back at the end of the month when you get your pay cheque. The money can be deposited into your account usually within 24 hours and is usually used as an emergency fund emergency for sudden unforeseen situations, such as car repairs, unforeseen bills etc.
It is quite straightforward to get a payday loan. All you need to qualify is be a UK resident over 18 years of age and be in full time employment with a provable income. Pretty simple really.
As mentioned before, payday loans are for relatively small amounts of money. First time borrowers usually only get approved for loans up to about £350. However, customers who have paid off a loan previously and return for another one could get approved for a loan up to £750, even £1,000 with some lenders.
As the lender knows that the loan is relative to the amount of income earned by the borrower, there is little risk as far as the lender is concerned. This allows people with a poor credit history to obtain a payday loan.
So why are payday loans getting so much bad press? As a result of the loan being short term, often only for two or three weeks, the APR (annual Percentage Rate) can seem to be very high. It may well cost you £20 to borrow £100 for a week or so. Certain bodies have picked up on this and are now calling payday loan lenders everything under the sun calling it daylight robbery and saying that payday lenders should be banned.
But if you need a couple of hundred pounds in a hurry, say for car repairs so you can carry on getting to work each day, where do you turn? Use an unofficial overdraft at your bank? Well at current rates, one well known high street bank charges £5 a month and a daily fee of up to £25 for using an overdraft witout authorisation. So who is worse?
Payday loans are useful for short term instant cash loans until the pay cheque comes in and are certainly cheaper than an unauthorised overdraft, but they are not suitable for longer term credit.
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