Payday Loans

A payday loan can be a sum of money less than your next payslip that can be applied for at short notice. These loans are normally applied for in an emergency situations, such as an unplanned trip to the dentist, or to cover a cash shortfall for a bill.

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What does a Payday loan offer?

A payday loan does not require a credit check, so they can be applied for at short notice, and you could have the money in your account as quickly as the same day.

Payday loans don't require you to be in full time employment. If you are a part-time worker, or even if you are retired, you can apply for this loan type. The loans can be used for any purpose, but they are strictly short-term. Lenders expect to be repaid with your next pay cheque.

When considering how much you would like to borrow, you are restricted by how much your actual income is. Because your loan will need to be paid back quickly, you should carefully budget to ensure that you can afford to make the loan repayment, as well as cover all of your usual expenses.

APRs for Payday Loans

The interest for payday loans tends to be high compared to longer-term borrowing, for three reasons:

1. because the loan is unsecured
2. because the lender needs to recoup admin costs over a much shorter period
3. likewise, any profit needs to be made over as little as 7 days

However, it's worth noting that using the (legally required) APR figure to measure short-term loans may be a bit unrealistic. APR means 'Annual' percentage rate and is meant to compare borrowings that last for a year or more, such as credit cards and even mortgages. The way APR is calculated assumes that you are charged interest not just on the loan but then on the interest as well - interest on interest. Needless to say this would make a 7-day loan exceedingly expensive over the course of a year.

We would suggest being cautious over the cost of payday loans and other short-term borrowing if you believe you might end up using them regularly. Yes, it's a very expensive way to borrow if you are resorting to payday loans once a month. For a stop-gap, where the alternative might be something grave such as a missed bill payment or a TV license, it could be a useful alternative.

Payday loans in practice

When applying for a payday loan, the lender will require a post-dated cheque for the amount of the loan you have taken. Alternatively, the lender will require you to sign a form allowing them to automatically withdraw that sum from your bank account on a specific date.

Payday loans are not without their risks. If you fail to repay your payday loan, it could result in you incurring CCJs (County Court Judgments) and a poor credit history.

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