There has been a lot of negativity surrounding payday loans for people with bad credit. Some have said that lenders have figured out a way to exploit those with bad credit ratings who cannot get a loan by offering loans with huge rates of interest. Here we want to determine whether or not bad credit payday loans are expensive and whether they can work as they are intended to work.
The Payday Loan Explained
Just in case you have not heard about payday loans, we will explain what a payday loan is. We aim to cover all aspects of the loan including:
- How much you can borrow with a payday loan;
- How long you can spread the loan over;
- The interest rate on the loan;
- Situations where this type of loan might be used;
- How to apply for a payday loan;
- Points to remember about payday loans;
- Alternatives to payday loans.
What Is A Payday Loan?
A payday loan is generally repaid in full on the next payday. Some lenders will enable you to spread the cost over three paydays. The money borrowed with a payday loan is usually small, anything from £100 to £500.
You apply for a sum of money up to £500 and the lender will want to know when your paydays are. You can repay the whole of the loan plus interest on one payday or spread it out for up to three paydays.
If you are spreading the loan repayments over three paydays, the lender will want to find out the dates you are paid. These are the dates payments will be taken by the lender to cover the loan and the interest incurred to that date. It is key to bear in mind that you need to have enough money left over after you have paid your other bills and the loan to manage until the following payday. You also have to keep in mind that on the next two paydays the lender is also going to be taking money from your pay. You should only apply for a payday loan if you know that you will have sufficient money to cover the loan and other expenses so you do not leave yourself short.
Payday loans were intended to offer a small cash sum of money to people who were met with an unexpected outlay and did not have the money until their next payday. This type of loan acts as a bridge as if approved for the loan money can be paid into the bank account often on the same day.
As the payday loan is a very short-term loan, the amount of interest is added onto the loan on a daily basis. This is where problems arose with some people saying that the interest rate was huge, often in the thousands of percent.
The APR on Payday Loans
As mentioned above the interest rate on payday loans is in the thousands of percent. It is not unusual to find loans of this nature have between 1000% and 6000% APR.
When looking at this and comparing it with the typical APR on a personal loan of around 39% APR, you would immediately conclude that yes payday loans are a very expensive way of borrowing.
However, the essential thing to bear in mind is that the APR is the annual percentage rate. Annual is a very important word here as it means every year. Personal loans may be taken out over years whereas the important factor is the payday loan is taken out over one to three months. This means you are not paying interest over the year.
If you were paying 1200% APR on loan over the year, the cost would be astronomical. However, when paying a loan over a month to three-month period it is not so terrible. The payday loan only becomes expensive if you find you do not have the means to repay it back on the agreed dates and have to refinance them.
An easy way to figure out APR if it is over 100% is to put a point in front of the final two figures. For example, if the APR was 4670% the amount paid on each pound that you borrowed would be £46.70 per year. The big thing is that you are not taking the loan out over the year so you would not pay this much. Providing you pay off the loan as agreed on time and in full the payday loan APR is not as bad as it first seems.
Bad Credit Payday Loans Become Expensive If You Cannot Repay It Back
Payday loans can become expensive if you find that you cannot repay the loan back on the agreed dates. This of course is also applicable to any other type of loan that you take out and cannot repay and interest accumulates.
This is because interest will be added onto the payday loan on a daily basis. If you cannot pay it on the due date, interest will continue being added on and the debt is going to spiral out of control.
Payday Loans Are Now Regulated
The good news is that payday loan regulations have made great strides since they first arrived on the market. Lenders now have to cap charges on loans so that borrowers are not paying more than 100% of the amount of money they originally borrowed by way of interest or other charges.
While payday loans may come with a higher rate of interest than a personal loan, they can work in the way they are designed providing they are repaid on time and in full.
Situations Where a Payday Loan Might Work
A payday loan can work as designed if you have looked into all aspects of the loan and understand what it entails. You should ensure that you will be able to afford the loan and know how much is going to be taken out of your pay on the dates agreed and you have enough left over to live on and for other expenses.
Providing you know you can afford the loan and you are not going to be left short, a loan of this nature might be suitable.
You could apply for a payday loan for any reason but common reasons and situations where payday loans work are:
- To pay off an unexpected or forgotten bill;
- To get out of an unauthorised overdraft which comes with high charges;
- To finance repairs to the car that come about unexpectedly;
- To pay the deposit on a bargain holiday that needs paying before next payday;
- For repairs or replacement of appliances, you cannot manage without.
When considering whether payday loans are costly loans you also have to consider what you gain from the payday loan.
A payday loan will generally provide you with the much-needed money on the same day you apply. This means if you are approved money could be paid into your bank account within hours. This money could be used to pay off an unexpected bill.
Without the loan, you might suffer a great deal of stress and even end up paying out more in the end than you would if you have taken out the loan.
For instance, if your car breaks down and you take a payday loan it could be towed and repaired the same day. Without the loan, you would have to leave the car stranded where it is at risk of theft and damage and have to pay for public transport. This could end up being very costly if you travel back and forth on a daily basis and you will still have to end up paying someone to get your car and repair it when you are paid. In this case, a payday loan could prove to be very beneficial, perhaps even save you money and certainly make life a great deal easier.
Applying For a Payday Loan
If you have decided that a payday loan is for you, the loan is affordable, and you want to go ahead and apply you can do so online. We can help to match you up with payday lenders who offer competitive rates and affordable loans even if you have bad credit.
We work alongside a panel of UK lenders, which means that from a single loan application a search is made with numerous lenders. This boosts your chances of being accepted for a loan.
To be eligible to make an application for a payday loan you do need to meet certain criteria. You do have to live in the United Kingdom and be over 18. You need a bank account in your name in the UK and have a debit card attached to it and the ability to create a direct debit. You are required to have a regular income and this can be through work or regular benefits paid into your account each month. This criterion may be dependent on the provider.
Important Points to Remember About Payday Loans
These are some of the most important points to remember about payday loans:
- Only take out a payday loan if you know without doubt you can repay the loan on time;
- Payday loans are not loans that should be relied on from month-to-month;
- Payday loans should be considered emergency loans;
- Payday loans can work in the way they are intended to work providing you repay the loan on time;
- The APR is the amount of interest you would pay if you took the loan out over the year. The payday loan is repaid within one to three months;
- Always make a note of the days the loan repayment will be taken otherwise late payment can incur fees;
- Be aware of any fees the lender may add onto the loan;
- The FCA now regulates payday loans.
Are There Alternatives to Payday Loans?
The payday loan is perhaps the most suitable loan if you want to borrow a small sum of money and you want to have the money paid into your bank account fast. It is also one of the fastest loans to apply for, and it does not require a comprehensive credit check so people with a poor credit past might get approval for it.
Another loan that is paid back relatively fast is the short-term loan. This type of loan may allow you to borrow between £500 and £1,000 and you may be able to spread the repayments for up to 12 months.
With the short-term loan, interest is also added onto the loan and the amount of interest you pay is going to depend on the APR or annual percentage rate. If the APR is 34%, this is the amount you will be charged if you take the loan over one year. As mentioned before the payday loan differs as you are not taking the loan over the year so you are not paying interest yearly.
A payday loan might be a more expensive way of borrowing than say taking out a personal loan. On the other hand, the payday loan is a fast loan that can work great when met with a financial emergency and you do not have the money until your next payday. Providing you can repay the loan as agreed the loan can work as intended. It does provide you with a financial lifeline when the unanticipated occurs, which otherwise might cause you a great deal of stress.
We can help to match you up with a lender who offers bad credit payday loans that are affordable, and which come with competitive rates. Make one application with our help and search for your loan with a panel of lenders in the UK.