Any loan you get will cost you more money than you borrow. This is because lenders charge interest on top of the loan amount and some financial institutions charge more than others. Payday loans are expensive because they only lend small amounts, and you can apply online. The money is also in your bank very quickly.
Why are payday loan rates so high?
Most loans, including payday loans, are worked out using APR (Annual Percentage Rates) using a figure worked out annually. However, Payday loans are designed to be paid back over a short period of time, so some lenders don’t think the APR is a true representation.
Interest rates also take into account the risk involved in lending the money. Payday loan companies have a high risk of borrowers not paying because they are normally used by people who don’t own their own homes. A bank, on the other hand, can use a person’s home as security and therefore offer a lower rate of interest as there is less risk that the loan will remain unpaid.
Are interest rates capped?
Yes. If the loan company is regulated by the FCA then there is a limit on the interest and late payment charges. For example, you will never have to pay back more than twice the amount you originally borrowed. If you don’t pay your loan of £100 on time, the interest can go up to £200, leaving you with a debt of £300, but it can’t ever go higher than that.
Can I see how much money I will have to pay back if I look online?
Yes. When you look at a payday loan website you will see the amount you want to borrow with the length of time you have to pay it back and the total amount payable. For example, a website might offer you a loan for £100 for a month. You’ll be able to see that the interest for that loan will be £24, so the total amount you need to pay back is £124.
Many websites have loan calculators so you can see exactly how much you will be paying back before you decide to take out a loan.
Are payday loans always more expensive than bank overdrafts?
Not necessarily, an unauthorised bank overdraft can cost you more during the same period. An unauthorised overdraft occurs when you use funds that you don’t have, without permission from the bank.
What should I consider when looking for a payday loan?
Make sure they are members of the Financial Conduct Authority (FCA). This means they are regulated and that they have to clearly explain their charges and what they can do if you don’t pay. It is never a good idea to borrow money from an unauthorised person. You could be charged hundreds of pounds if you want to increase the loan duration and intimidated for payment if you have problems.
Is it best to stick to loans over a short period?
if you pay the debt off quickly, you will pay less interest. However, if you know you can’t pay the loan off within a month but you can within two or three monthsm then get the loan for a longer duration and pay more. This means that you will keep your good payment record and you won’t miss payments.
How much can I borrow with a payday loan?
Payday loans normally start at as little as £100 and go up to £1000.
How do I apply for a payday loan?
You can apply online. You will be asked some questions about where you live, what you do for a living and your financial situation. Most companies will do a credit check and then you’ll be given the decision as to whether you can have the loan or not. If the loan is agreed, the money will usually be in your account on the same day.