For and Against Pay Day Loans
While payday loans have been popular for a long time in the USA, they are a comparatively new service for British borrowers, and a lot of people aren’t sure just what they are. Considering all the controversy over whether or not they’re a legitimate service or simply a form of legalised sharking, it’s a good idea for any UK resident toying with applying to realise exactly what they’re signing up for.
A lot of us have spent all our cash when nearing the end of the month to some extent, and have to economise a little by cutting down on socialization or other forms of non-essential expenditure. This is a perfectly normal (if irritating!) fact of fiscal life for most of us who are employed and get paid once a month. Sometimes all the same, running out of cash can be more serious than this if there are essential expenses to be paid such as an unexpected bill or repair cost.
Many people use the overdraft facility of their bank accounts to allow a bit of an allowance when funds are short, but in today’s world many people are permanently overdrawn and approaching their limits, so this may not be an option.
A different way of tiding you over until your next pay is to make use of a credit card, both for buying things and cash withdrawals. There are several difficulties with this, including the fact that credit cards are an expensive kind of credit, and it’s tempting to build up a big debt which can have a fateful effect on your long term financial health.
If neither of the previous two options are right for you, then a payday loan might well be worth considering. In short, these loans are available to nearly anyone with a bank account and a debit card, and who is working. When you take a payday loan out, the lender will transfer the amount you apply for straight into your bank account, commonly inside 24 hours of your application being authorized. During your application you will have supplied your debit card information, and the loan company will use these to automatically repay your loan on your next payday, as well as their fees.
And therein lies one of the big problems with payday loans – the fees.
This type of finance is notorious for being expensive, and punitive APRs of 1000% or even much more are the norm. These interest rate figures are maybe a little misguiding, as the APR system is designed for loans with a longer repayment period than pay day loans where the term is measured in days rather than years. All the same, these loans are rather pricy, with a cost of 20%-2% of your loan amount generally the going rate.
The next serious drawback is that repaying your loan and fee is likely to leave you moneyless again at the end of next month, and it’s easy to get into a punishing vicious circle of applying for a loan every month – which is when those high APR rates will really sting.
So, is there any benefit to pay day loans? Of course, but only genuinely for a genuine crisis where there is no other choice. If you’re relying on cash advances to finance your everyday life, then it would be a better idea to examine your spending and see where you can economise, or to restructure your debt using a consolidation program or similar to free up some additional money every month.
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