If you are looking for a guide on payday loans in the United Kingdom, you have come to the right place. In this blog post, we will explain everything you need to know about these loans and how they can benefit you.
We will cover topics such as finding a payday loan, what to watch out for when taking out a loan, and how to make sure you repay your debt on time. So whether you are considering taking out a payday loan or just want to learn more about them, keep reading!
What is a Payday Loan?
A payday loan is a short-term, high-interest loan that is typically used to tide people over until their next paycheque. These loans are typically for small amounts of money, which can be helpful in an emergency situation.
For example, if you need to pay for car repairs but do not have the money upfront, a payday loan can help you cover the cost until you get paid again.
However, it is important to remember that these loans come with high-interest rates and should only be used as a last resort.
How does a Payday Loan work?
In order to take out a payday loan, you will need to fill out an application with a lender. This application will ask for basic information such as your name, address, and income details. You will also need to provide proof of income, which can be in the form of payslips or bank statements.
Once you have submitted your application, the lender will review it and decide whether or not to approve you for the loan.
If you’re approved, you will then need to sign a contract agreeing to repay the loan. Once signed, you will then receive the money into your chosen bank account. This usually takes place within 24 hours, and in most cases, specifically with online lenders, this can happen within minutes.
Once in receipt of the funds, you will then need to pay the loan back over a given time period paying a specific, predetermined amount each month, including the given interest rate. Interest rates on payday loans tend to vary between different lenders, but they are typically very high, averagely in the region of 700% APR. However, research shows that the average annual rates can be as high as 1,500%, which, when compared to traditional credit cards that average around 22.8% APR, is incredibly expensive.
In terms of repayment terms, most payday loans will last up to one month, although some lenders may offer longer terms. It is important to note that you will be subject to late fees and other penalties if you do not repay the loan on time. You should always make sure you’re working with a reputable loan provider, especially since some payday loan providers are seen as predatory with their practices.
There are a few things that you can look for to ensure that a lender is reputable. Firstly, they should be registered with the UK Financial Conduct Authority (FCA). You can easily check this by going on the FCA website and quickly searching for the lender in question. If they don’t come up, it’s best to avoid them.
Another thing to look for is positive reviews online. A quick Google search should bring up any reviews that have been left. If there are mostly positive reviews, then it’s likely that the lender is reputable. However, if there are mostly negative reviews, it’s best to avoid them. Finally, you could always ask for recommendations from friends or family who have used payday loans before. If they had a good experience with a particular lender, then it’s more likely that you will too.
If you can’t repay your loan, you should first contact your lender and explain the situation to them. They may be able to offer you an extension on the loan or help you in some other way. If you’re still struggling to repay your loan after speaking to your lender, you could always consider taking out a debt consolidation loan or speaking to a financial advisor.
Who uses payday loans?
Payday loans are typically used by people who are in need of quick cash and do not have the means to obtain it any other way. For example, if you have an unexpected car repair bill that you cannot pay for, a payday loan can help you cover the cost until your next paycheck. These loans can also be helpful for people who are struggling to make ends meet and need a little extra money to get through the month.
However, as we mentioned before, these loans come with high-interest rates and should only be used as a last resort.
What are the advantages of a Payday Loan?
You’ll want to think about many advantages, which is what makes payday loans so appealing to people:
- Easy Access to Money – One of the main advantages of a payday loan is that it provides you with quick and easy access to money. If you have an unexpected bill or expense that you need to pay for, a payday loan can help you cover the cost until your next paycheck.
- No Credit Check – Another advantage of payday loans is that most lenders do not require a credit check. This means that even if you have bad credit, you can still qualify for a loan. This is because payday loans are typically for small amounts of money, and providers are more concerned about whether you can afford the loan here and now rather than your overall credit history.
- Fewer Requirements for Acceptance – In addition to not requiring a credit check, payday loans also have fewer requirements for acceptance. For example, many lenders will not require you to provide collateral in order to take out a loan.
- Loans are Typically Unsecured – As we mentioned before, payday loans are typically for small amounts of money. This means that they are typically unsecured, which means you do not have to put up any collateral to take out the loan.
- Repayment Terms are Flexible – Another advantage of payday loans is that they come with flexible repayment terms. Most loans are typically for one month, but some lenders may offer longer terms. This means choosing a repayment schedule that works best for you and your needs.
- Most Loans Can Be Cancelled – If you find that you cannot afford the loan, most payday loans can be cancelled. This means that you will not be responsible for repaying the loan. There is typically a 14-day cooldown period where you’ll be allowed to do this.
What are the disadvantages of a Payday Loan?
However, just like there are advantages, there are also some disadvantages that you absolutely must be aware of when it comes to taking out and using payday loans. You don’t want them to cause you more problems.
Payday loans are expensive – The biggest disadvantage of payday loans is that they are extremely expensive. The interest rates on these loans are typically very high, averaging around 700% APR. This means that if you take out a loan for £100, you could end up paying back £700 just in interest alone if it takes you a year to pay it off. However, even if you’re able to pay it off properly in 30 days, which is an average payday loan term, you’re still going to be paying back £157.53, which is 50% more than you took out. This is why it is so important to make sure that you can afford the loan before taking it out. You don’t want to find yourself in a situation where you’re struggling to make ends meet because of the high-interest payments.
Payday loans can have a negative impact on your credit score – Another disadvantage of payday loans is that they can have a negative impact on your credit score. If you miss a payment or default on the loan, this will show up on your credit report and could hurt your chances of getting approved for loans in the future. You should only take out a payday loan if you’re confident that you can afford the payments and will not miss any.
Payday loans can trap you in a cycle of debt – Another downside to payday loans is that they can trap you in a cycle of debt. If you cannot pay off the loan when it’s due, you may be tempted to take out another loan to cover the cost. This can lead to a downward spiral of debt that becomes increasingly difficult to escape. It’s important to remember that payday loans are not a long-term solution to financial problems. They should only be used in emergency situations where you’re confident you can repay the loan when it’s due. If you find yourself taking out multiple payday loans, it’s time to seek professional help to get your finances back on track.
Some loan providers have a bad, predatory reputation – Unfortunately, not all loan providers are created equal. Some have a bad, predatory reputation for taking advantage of people in financial distress. These lenders will often approve loans that are much larger than what the borrower can afford and charge extremely high-interest rates. This can trap the borrower in a cycle of debt that is even more difficult to escape. It’s important to do your research and only work with reputable lenders with a good track record.
How can I qualify for a Payday loan?
In order to qualify for a payday loan, there are a few things you’ll need. This is because a provider isn’t going to just give you money without any information or assurances.
- First, you’ll need to be at least 18 years old and have a regular source of income. This could be something like a full-time job, disability benefits, or even child support.
- You’ll also need to have an active bank account in good standing. This means that you shouldn’t have any overdrafts or negative balances.
- Finally, you’ll need to provide some form of identification, like a driver’s licence or passport.
If you have all these, then you should be in good standing to take out a payday loan and be accepted.
How can I apply for a Payday loan?
Applying for a payday loan is typically very easy and can be done online or in person.
- If you’re applying online, you’ll just need to fill out an application form with some basic information about yourself and your finances.
- The lender will then review your application and decide whether or not to approve you for a loan.
- If you’re approved, the money will be deposited into your bank account within a few days.
In-person applications are typically a bit more involved. You’ll need to provide proof of income and identification. The process can take a bit longer, but you should still get your money within a week or so.
What happens if you fail to pay back a Payday Loan?
If you ever find yourself in a position where you’re unable to pay back your payday loan, even if that means missing one payment, this is where things can become a little problematic. Your lender may start to contact you about the missed payment and ask you to pay it back as soon as possible. If you’re still unable to do so, they may start to charge additional fees or interest. This is where things can really start to spiral out of control.
If you’re not careful, you could end up owing thousands of pounds more than what you originally borrowed. What’s more, your lender could even take legal action against you. This is why it’s so important only to take out a payday loan if you’re confident that you can afford the payments.
How are Payday Loan fees calculated?
When you’re taking out a payday loan, it’s important to be aware of the fees that you’ll be charged. These fees can vary depending on the lender, but they typically range from £25 to £30 for every £100 that you borrow. This may not seem like a lot, but it can add up quickly if you’re not careful. For example, if you borrow £300 for two weeks, you may end up having to pay back as much as £390.
That’s almost double what you originally borrowed! This is why it’s so important to make sure that you can afford the payments before taking out a loan. The very best way to see how much you’re actually paying is to use the form or calculator on the website you’re taking the loan out.
They’ll be able to show you precisely what you’re working with and how much you can pay back, and how much interest you’ll be paying overtime. However, you can use a formula to work it out for yourself, just to ensure you know you’re budgeting correctly and are getting into a loan agreement you can afford.
The formula looks like this, and bear in mind this can be a little complicated because most providers will be using compound interest, which means your interest will be worked out on how much you still owe on a monthly basis.
Multiply the principal (p) by 1 plus the interest rate (as expressed in decimal points) and take that number to the “n” value (which represents the number of years of the loan, in this case, six months would be 0.5).
For example, £10,000 borrowed at 6 percent interest for 1 year will cost you £612.64 if the interest is compounded quarterly. As you can see, with so many variables at play, it’s always going to be better to use a calculator your provider offers you, so you can see exactly how much you’re going to be paying back.
Because of UK Financial Conduct Authority law (FCA), there is a limit to how much you can be charged. It states that if you’re taking out a loan for 30 days, you will pay no more than £24 in fees for every £100 taken out. If you miss a payment, the most you can be charged is £15 plus interest on the amount of money that you borrowed.
Can I get a payday loan if I don’t have a bank account?
You may be able to, but it will likely be more difficult, and the interest rates could be higher.
It’s always better to have a bank account when taking out a loan like this, as it makes the whole process much easier and smoother. The lender will be able to transfer the money directly into your account, and you can then use that money however you need to.
If you don’t have a bank account, you may still be able to take out a payday loan, but it will likely be through a different type of lender. These lenders are called door-to-door lenders, as they literally come to your door and hand you the cash that you’ve borrowed. Of course, this comes with its own risks, as you’re handing over cash to a complete stranger. It’s important to only use reputable door-to-door lenders and to make sure that you’re aware of the interest rates before agreeing to anything.
Do payday loans build credit?
No, payday loans do not help you build credit. In fact, they can actually have the opposite effect. Taking out a payday loan may make it more difficult to secure other types of finance, such as a mortgage or personal loan.
Because they’re such high-risk loans, if you default on a payday loan it will likely negatively impact your credit score. This is why it’s so important to make sure that you can afford the payments before taking out a loan. It’s also important to remember that just because a lender doesn’t run a credit check, it doesn’t mean that the loan won’t show up on your credit report.
Lenders are required by law to report all loans to the major credit reporting agencies, and those agencies will then use that information to calculate your credit score. So, even though the loan itself won’t help you build credit, if you make all of your payments on time it will reflect well on your score.
Find out more about credit scoring in our article: Credit Score: Meaning, Range, Factors, Improving It.