Payday loans are a form of short-term credit with extremely high interest rates – read our guide to learn about them and what the alternatives are
You may be tempted to borrow money using a payday loan, but with interest rates as high as 2,000% APR or more these quick loans could prove very expensive.
uSwitch explains how payday loans work, how to compare payday loans, why they could prove very costly and what cheaper ways there are to borrow money.
What are payday loans?
Payday loans let you borrow small amounts of money for as little as a week or a month, but with very high interest rates, which mean a payday loan could end up costing far more than you bargained for.
They’re called payday loans because they’re usually used to help people keep up with their finances until they get paid at the end of the month. However, many people use payday loans to help finance a previous payday loan.
Payday loans, due to their nature of being short-term, usually rollover if you fail to pay it off at the first time of asking. When they rollover, the interest rate adds up, and you could end up paying anything up to 2,000% or even higher in interest.
Why shouldn’t I take out a payday loan?
Payday loans are quick loans that let you borrow from £50 to £1,000 for a few days or up to a month until you get paid the following month as
Payday loan companies typically charge up to £30 for every £100 cash loan you borrow for up to 31 days.
This may sound reasonable on the face of it, but it equates to an APR (annual percentage rate) of a whopping 2,255%. So if you fail to pay off the £130 in full, you’ll have much more to payback than you would with any other form of credit.
The idea of payday or cash loans is that they give you access to emergency cash for a short period without you having to go to your bank. However with such high interest rates borrowing a small amount of money can be very expensive.
Applying for a payday loan is easy as lenders make few checks and in some cases credit checks are not carried out at all. However payday loans can be a very expensive way to borrow money. For example, a cash loan of £500 for 31 days could cost almost £150 in interest – or almost £5 per day making them expensive quick loans.
It’s important to consider if you’ll even be able to afford paying back the full amount on time including the interest.
One of the biggest problems with payday loans is that the following month when the loan is repaid you may find that you are short of money again and a further loan is needed.
In this way the cost of borrowing a small amount of money can increase dramatically. Payday loans have been blamed for getting people into debt problems they are unable to get out of.
As a last resort a payday loan could provide an emergency cash advance for up to a month. However make sure you budget so you can pay the cash advance back within the agreed term and so you don’t have to take out another payday loan the following month. Although payday loan interest rates are very high, charges vary – shop around to find the best deal and compare payday loans.
Ultimately, you should avoid taking out a payday loan and look at the alternatives available, as nearly all other forms of credit will be much cheaper. Even if you have a poor credit history, there are still options out there besides payday loans.
What can I do instead of taking out a payday loan?
Payday loans are by no means the only way to borrow money on a short-term basis, even if you have a history of bad credit.
They can be one of the most expensive forms of borrowing available, so it’s important to look at your options before taking out a payday loan.
- Take out an authorised overdraft. If your bank account doesn’t already have an overdraft facility available to you, speak to your bank to see if you can get one. It’s best to avoid borrowing money from your current account unless you have an authorised ovedraft. Although the rates on an unauthorised overdraft are much more expensive than most forms of borrowing, it is still cheaper than a payday loan in terms of interest – just beware of what it might do to your credit rating and your relationship with your bank. Authorised overdrafts charge an APR of around 15-30%, which is much cheaper than the 2,000% plus you might get with a payday loan.
- Withdraw a credit card cash advance. Credit card interest rates can be anything between an average of around 10% to 30% APR, which again, is much cheaper than a payday loan. If you need cash fast, then a credit card cash withdrawal is likely to be a cheaper option than a payday loan. The interest will be charged to you immediately and will accumulate daily, but borrowing £500 will be cheaper to pay back than with a payday loan. You will just need to make sure that you don’t go over your credit card limit before doing so.
- Join your local credit union. Becoming a member at your local credit union could be a much cheaper way to borrow money than payday loans, as the most interest a credit union can charge for borrowing is around 26% APR and many charge 12.7% APR. One downside is that many credit unions only lend to members who save into the credit union. If you’re unsure, speak to your local credit union, and find out what your options are. They’re not banks and they are run by its members, so they can be much more understanding to your situation than a typical bank or any other financial institution.
- Get debt help. If you are in financial difficulties, before you borrow money or take out a cash loan, use our debt management help guides and articles to get information on your situation that could help you get your finances on track.
- Debt Consolidation Loans These loans can be suitable for people whose debts are spread over multiple sources
- How To Strengthen Your Credit Rating Good credit rating’s will determine whether you’re offered credit and at what rate
- Secured Loans Guide A secured loan means the loan is lent against your home house