The Basics of Payday Loans
With more people needing more fast cash, the payday industry is growing rapidly and enormously. Because it's easy to avail, people are turning to the financial product for immediate money troubles. But while it's popular now, controversies especially with respect to its high interest rate can't be helped. With the risks involved, you need to know the basics of payday loans to avoid the consequences and pitfalls of debt.
What exactly are payday loans?
As the name suggests, payday loans are short term loans that you can borrow with the promise of paying it back using your next paycheck. In essence, the loan is a cash advance on your paycheck which can amount from £100 up to £1000. Typical terms last for a month but it can longer, sometimes up to 5 months depending on your lender's terms and conditions.
Payday loans, while convenient and quick to avail, come with high interest rates. Most lenders offering the product have an average Representative APR (annual percentage rate) of about 1,000%. In some cases, it can reach as much as 5000% which when compared with conventional options is definitely steep.
To compare top lenders in UK offering payday loans based on APR, click here for useful comparisons.
How does repayment works?
Since the amounts are smaller, borrowers are expected to pay back the loan within 30 days or a month. But as mentioned, some lenders may extend it up to 3 months when applicable or requested. The total amount to be paid is already inclusive of interest as computed based on the loan's APR.
With payday loans, payment is usually made through your bank debit card. This is as per agreement that you signed with your lender once the loan is approved. The lender can take the designated amount from your bank account during the appointed schedule of payment.
What happens if you can't make repayments?
In cases when the bank account doesn't have enough money for the lender to debit from, the lender will still continue to ask the bank for the money but in installment. If this happens, there are going to additional charges for late payments that you also need to pay for.
To avoid this scenario, always make sure to have sufficient balance in your account. This will not only ensure that your payments are on time but you will also avoid charges than when added up can be really expensive.
When to extend a payday loan?
In case you come to a point when you're having trouble paying back the loan, you can speak with your lender to make new arrangement. Normally, your lender will offer to extend the term so you'll have more time to pay it all back. This new set-up is also known as loan rollover where a new agreement is agreed upon which may come with new charges, extra fees and additional interest.
Because of the extra cost, rolling over is often discouraged. You can do it if you really must, just be careful not to fall into the cycle because you'll only end up paying more than what you bargained for.