5 Facts About Payday Loans

Many people use payday loans as a way to help them with their short term financial situations. This could be either to pay for an unexpected bill, help fix their boiler or even buy the weekly food shop. Payday loans are very accessible as many lenders can now accept applications through mobiles.

License: Creative Commons image source
License: Creative Commons image source

So what are the dangers surrounding payday loans and why should people think twice before applying for one?

1. Payday loans are high cost short term loans

This type of loan is designed to help people get by financially for a few days or until their next payday. Normally the cost of taking out a payday loan canbe relatively low, compared to receiving extra charges for an unauthorised overdraft. However, many borrowers struggle to repay the loan and find themselves:

  • Rolling over their loan;
  • Paying late payment charges, extra fees and interest;
  • Having to take out another payday loan.

2. Payday lenders can charge more than credit cards

Many payday lenders will advertise a fee rather than an interest rate. Generally a £100 loan for 30 days will come with a £30 fee. The borrower will then have to pay back £130. According to Money Saving Expert on the 9th July 2013, if the borrower was to use a typical credit card that charges 20% APR for the same amount over a year instead of 30 days, they would only have to pay an extra £1.63  a month for borrowing £100, as long as there are no missed repayments.

3. APRs do not represent payday loans effectively

By law, all payday lenders must feature a representative example including an APR to display the cost of the loan. The APR (Annual Percentage Rate) represents the interest and fees used to repay a loan. However, the APR for payday loans can be misleading as they represent the cost over a year, not a month. This fails to truly show the cost of taking out a payday loan over a month. For more information about APRs and how they work, visit the APR Explained page.

4. Stay clear of rolling over your payday loan

Payday lenders can allow borrowers to roll over their payments if they are struggling to repay the loan, but only up to a maximum of three times. The lender will extend the time period for the borrower; however this will incur another fee. If the borrower continues this extension for a couple of months, the borrower will find themselves only paying off the interest rather than the payday loan itself. This is how many people fall into the payday loan trap.

5. Payday loans could stop people from getting a mortgage

A handful of mortgage lenders are turning down applicants who have previously used a payday loan company to borrow money from, even if it was repaid on time, according to Money Saving Expert on the 9th July 2013

This is because these borrowers are considered to be risky by the mortgage lender. If a mortgage applicant has applied for a payday loan on their credit record, it implies the borrower has a possible issue with budgeting and managing their money. This raises the question whether the mortgage applicant will be able to pay off their monthly mortgage payments.

Therefore you may want to think twice before taking out a payday loan and spend a little more time researching what alternatives are available to you.

About the Author: Bryony Smith is an Online Marketing Exectuive for Smartloan. She writes blog posts and articles related to the finance and short term lending industry. You can follow her on Twitter @BSmithers89

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