When life throws us a curve ball we sometimes need to come up with a solution and we may have little time to do so. Especially when it comes to financial matters. We can often find ourselves in a position where we need cash and we need it fast. Not all of us have a reliable source of emergency funds we can go to when we’re in need.
For the most part we can go without certain things until payday arrives. If the television breaks it’s annoying but not the end of the world. However, if our car breaks down or the boiler decides to give up this can be much more problematic. It can even be dangerous. When these things happen, we may not necessarily have the funds readily available to deal with the situation. This is where a payday loan can come in useful.
What Are Pay Day Loans?
A payday loan is usually a short-term burst of cash that covers our costs until payday arrives. This can be rather useful in an emergency, allowing us to deal with the issue at hand then pay the money back in the coming days or weeks, once things have returned to normal. Banks and building societies generally don’t offer this service, instead preferring to focus on larger loans (of over £1000) for a longer period of time. Those of us dealing with a flat tyre don’t have the time to arrange a sit-down meeting with our personal banker only to agree to a loan of £1000 over 32 months. We just need £100 for our tyre which we’re happy to pay back at the end of the month. This could only be a week or so away.
Payday loans themselves are usually much smaller amounts of money of between £50 to £500, although they can be higher amounts if the situation calls for it. There are options to pay the money back over a longer period of time, such as multiple paydays therefore it could span a month or so. But in truth, payday loans rarely last this long in most cases. Like any form of borrowing, the quicker they are paid back, the less interest the customer will pay to the lender.
Can I Trust A Payday Loan Company?
Always make sure the payday loan company you’re considering is legitimate. To do this it’s helpful to try and find out if they are a registered member of the UK’s Financial Conduct Authority (FCA). Members of the FCA are monitored, audited and approved by the UK government, meaning they adhere to the rules all financial services must follow in order to trade in Great Britain.
Companies that are bound by FCA regulations need to follow lots of rules to trade ethically and legally. But there are 3 important ones that matter the most to customers, these are:
- All interest rates charged to the borrower must be capped at a maximum of 0.8% per pay at the amount originally borrowed.
- Charges applied to those who default need to be fair and never exceed £15. If a borrower fails to keep up with their payments, this stops them getting into excessive further debt.
- No borrower will be forced to ever pay back more than double the amount they originally borrowed. Stopping lenders charge unreasonable rates of interest.
New payday loan companies that are trading ethically and legally are bound to these rules just as much as banks and insurance companies are. This is why much of the stigma applied to payday loan companies is unwarranted. They are subject to the exact same laws as leading mortgage and other financial lending firms.
How Does Interest Work?
Interest is essentially the profit made by the loan company. Think of it as the fee you pay them to use their services. A payday loan company is no different from any other lender in this regard. They all charge interest and without it they couldn’t run their business to begin with.
The rate of interest is dictated by something called an Annual Percentage Rate (APR). This is a way of working out how much interest should be paid over an average of 12 months. The 12 month number is simply an arbitrary timescale in order to develop a pay scale, but in fact not all loans, especially not payday loans, are 12 months in length. Payday loans only last a matter of weeks, or months in some cases, but generally APR is a universal way for all finance companies to fairly and ethically calculate interest.
Can I Get A Payday Loan If I Have A Poor Credit Score?
Generally speaking, payday loan companies do consider people who have a less than spotless credit rating and even CCJs are considered. This depends on the company and the individual as well as the circumstances behind applying for the loan. Payday loans of different to long term credit getting one can be easier than securing long term finance. Using payday loans and paying them back in time can actually be an effective way to build one’s credit rating back up. After all getting accepted for credit and paying it back on time are the two factors that help and hinder credit scores.
How Do I Know A Payday Loan Is Right For Me?
Payday loans exist to help people out of a sticky situation, usually in an emergency or when they need some financial support on a short-term basis. People turn to payday loans usually when they don’t have anywhere else to go and have been refused a loan before.
However, more and more people are using payday loans instead of credit cards and traditional bank overdrafts because they find it cheaper to do so. Naturally this depends on the amount being borrowed and the time taken to pay it back. Many people have an overdraft and a payday loan company on stand-by just in case they need funds from multiple sources.
The service payday loan companies offer is quick cash in a situation when it’s most needed. This is a scenario many of have found ourselves in at some point in our lives, so it’s good to know that there is always a support system available should we ever find ourselves in short-term financial difficulty.