How do payday loans work?
Are you looking for a payday loan? Read on to find out all the information you need to know about payday loans.
There are several things you need to consider before taking out a payday loan, including the amount you'd like to borrow, and how long you'd like to repay it over.
You also need to consider who you want to borrow from. This will really depend on the answers to the above questions.
To be fair you may have thought a loan is a loan. That they're all the same. To some extent they are. The lender loans you a sum of money and you pay it back. But the devil is in the detail. There are several different types of loan. You can read about them here. But as you've landed on this page it's highly likely you're thinking about a payday loan.
You may have seen stories in the news about lenders who offer these types of loans, such as Wonga.
But what are payday loans and how do they work?
On the face of it these loans work the same way as any other. The customer visits a high street shop, or a website, and completes an application. If approved they can be given the cash within an hour. But that's where the similarities with most other types of loan end.
The borrower has to repay the loan very quickly. Usually within 30 days. Once the customer receives their wages, they then repay the loan in full. But finding such a large sum could trap borrowers in a cycle of debt. Repaying the loan in a single instalment could inevitably leave them struggling the following month. In some cases, they may need to take out another payday loan to cover their expenses. And once they pay this back, they may need to take another. And another. And so on.
The way payday loans work has changed, since bad publicity about them began to surface. They have now turned into very short term loans repayable within one to two months. But the final repayment can still be a large one, which means the problem hasn't entirely been solved.
But why are payday loans so popular?
It's a good question. The answer could be that they are often so quick. They are usually far faster than a loan from a high street bank for example, where it might take several days to receive the money. If a customer needs cash quickly because of an emergency, payday loans can offer a fast and easy solution, despite the very high interest rates and fees associated with this type of loan.
The lenders are also keen to provide people with loans. And sometimes will approve customers who wouldn't get credit elsewhere. Unfortunately, this could lead to some people over-extending themselves.
Despite a government clampdown in the sector, you can still find lenders who offer loans from one to two months. And whilst they may offer cash fast, they still have the drawbacks of the old-style payday loans. They still require a large lump sum payment rather than spreading the cost of the loan over an extended period.
This can cause issues as some people find it easier to budget for smaller payments over a longer period than much larger payments over fewer instalments.
Applying for a payday loan
Everyone's circumstances are different. One alternative to a payday loan is a short term loan.
You'll repay it over a longer period. You can choose from three to twelve months. And because you have longer to pay it back the instalments are smaller.
But it's entirely up to you. If a short term loan does sound more attractive to you, it does you can click here to learn more.