UK payday lending has continued to increase in popularity over each of the last few years. As more people are struggling financially, and the prices of some basic necessities are on the rise, the number of Britons who have turned to payday loans has more than doubled. Some say this type of loan is problematic and only causes further financial distress to those that use them.
If you are going to use a payday lender in the UK, you should take the time to be sure that you are using the loans as they were intended and that you are getting the best possible deal. Below are some tips for receiving the best possible payday loan in the UK, and for using such loans wisely.
Shop Around
Some mistakenly think that all payday loans are exactly the same. While they do have many similarities, sometimes one lender will offer a deal that is a bit better than the others. That is not to say that there are payday lenders that offer low interest rates, but there are sometimes those who might offer a reduced rate, especially for new or returning customers. You may even hear of some payday lenders offering the first loan free.
When selecting a payday lender, you should ask how much you could save by paying the loan off early. If most of the money added onto the dollar amount borrowed is interest, there will be significant savings if you pay the loan back early.
If, however, most of the money is in fees, such as application and processing fees, you may save next to nothing by paying the loan back early. That is why you need to fully understand the terms of the loan. Some lenders boast about having very low rates, but there could be a very large amount tacked onto the loans in the forms of fees. These fees do not change at all if you pay the loan back early.
Borrow Small Amounts
Some who turn to payday loans borrow the maximum amount possible because they figure if they are going to have to pay all the interest and fees, they might as well make the most of it. This thinking is flawed on many levels.
First and most obvious is that the more you borrow, the more you will have to pay in interest. The exception to this would be if you were borrowing from a lender where the majority of charges were in the form of fees instead of interest.
Still, you should never borrow more that what you need. Remember, you are going to have to pay this loan back in full come payday. If you borrow the maximum allowed, there is a much greater chance that you will feel the need to take out another payday loan as soon as you pay it back.
One of the biggest keys to getting the best deal on a payday loan is to use the loans responsibly. That includes borrowing only what you need.
Limit Yourself
While some are fighting for legislation that would require a waiting period between payday loans, if you are wise you will impose such a limitation on yourself. The borrowers who get into the most trouble with payday loans are the ones who continue to roll the loan over each time that they pay it back.
Instead, you should resist renewing the loan for at least a few days after you have paid one back. Some borrowers have found that doing so actually helped them break the cycle of borrowing, paying it back and borrowing again.
Instead of renewing the loan right away, just tighten your belt for a few days. Better yet, tighten it until your next payday so that you do not have to take another payday loan at all.
UK payday lending takes a lot of heat, but the truth is that these loans are the only option for some people. As long as they are used as they were intended – for short term needs – rather than viewed as long term solutions, there is less of a chance that a consumer will get into trouble by using payday loans.
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There are many companies in the UK that offer payday loans. While the interest rates are extremely high, these loans continue to grow in popularity. With creditworthiness not being a factor, more and more Britons are finding that getting payday loans is so fast and easy that the loans are irresistible. They should, however, be used with extreme caution as some have found themselves further in debt as a result of using payday loans unwisely. Below are the answers to three of the most commonly asked questions about UK payday lending.
Are the Interest Rates REALLY That High?
Unfortunately, yes. The interest rates for a typical credit card are around 20% APR. A personal loan from a bank is a bit less. A payday loan can have an APR that is over 1000%. The exact APR will depend on the length of the loan and the amount borrowed, but will be, at the very least, close to 200% APR.
Some wonder how it is legal to charge such high interest rates. There are those who petition lawmakers to put laws on the books that would prohibit such high interest. Past attempts to have such legislation enacted have been unsuccessful.
In some cases, a payday lender in the UK will advertise that they offer a low interest rate of around 25%. This sounds fairly reasonable, and it would be except for the additional fees that are also tacked onto the loan. When looking at payday loan products, you must consider the total cost of the loan, including all fees, as well as the interest rates.
How Long Will I Have to Pay the Loan Back?
Most payday lenders in the UK require that the loan be paid back in full on the borrower’s next payday. This could mean that you might only have two or three days before the loan comes due. In other cases, you might have the loan for close to a month before you are paid again.
If you can pay the loan back before the designated due date, you should. You will be able to save money on interest by paying the loan back early. Keep in mind that an early payoff will not reduce the amount you will have to pay for fees, just for interest. Still, if you pay the loan back early, it is possible that you could save half of the total amount of interest due.
Because the loans must be paid back on the borrower’s next payday, these are short term loans. UK payday lending options are intended only to assist borrowers with unexpected, short-term financial needs. To try and use this type of loan for long term needs is unwise as it will cause the borrower to get into a cycle of rolling over the loan which is, obviously, very expensive.
How Much Can I Borrow at One Time?
The amount that you will be able to borrow depends on the amount of your gross monthly income. The maximum payday loan in the UK is about 1500 pounds. Depending on your income level, you may only qualify for a lesser amount.
Those using a payday loan for the first time will typically have a smaller credit limit which will be increased for their second loan.
Another mistake that some borrowers make is to borrow the maximum amount for which they qualify. Because the interest rates are so high, it is very important not to borrow more than you need as this will help minimize the amount of interest that you will have to pay back.
It is very easy to find payday lenders in the UK, but it is a good idea to exhaust all other options before choosing to take a payday loan. It is the most expensive option and, if used irresponsibly, can make an already troubled financial situation even worse.
Instead of turning to payday loans first, instead reserve them for truly unexpected and short term needs, such as when an automobile breaks down or a bill comes due a few days before payday. Then, pay the loan back right away when you get paid.
Use payday loans wisely so that you don’t get taken to the cleaners.
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In every country in which a form of payday loans are available, there is controversy surrounding the loans. The UK is no exception. As more and more Britons turn to this type of loan, more detractors express their concern about what that means and to the practices behind the lending.
The Loans
When mortgages were being handed out in the United States without anyone verifying income or other qualifying information, watchdogs cried foul. Today, it is known that such practices, also called predatory lending, helped usher in one of the worst financial crises in recent history. Payday lending in the UK, say detractors, is based on the same principles and leads to similar problems.
Because qualifying for a payday loan involves nothing more than verifying employment and that an active checking account exists, even those with very poor credit can qualify. That means that those borrowers who would be turned down by other lenders can still get a payday loan.
Of course, because there are no credit checks, the risk for non-payment is greater than with traditional loans. That risk is clearly reflected in the amount of interest that is charged. Those who use payday loans in the UK will pay up to 1000% APR, and in some cases, even more.
Repayment is usually made in one lump sum on the borrowers next payday. In some cases, the loan may be split into two payments, but this is the exception rather than the rule. Payment is typically made through automatic debits of the borrower’s account.
Once the loan is paid back, the borrower can then take out another payday loan. The amount one can borrow depends on their gross monthly income and how often they are paid each month. First time borrowers can usually qualify for a smaller amount which will increase after the first loan has been paid back.
The application takes only a few minutes to fill out and, once the borrower’s information is verified, the money is usually deposited directly into the borrower’s bank account within one business day. This makes these loans even more attractive to someone who is struggling financially.
Therein lies the problems, say some.
What it Means
The number of payday loans taken out by Britons has more than doubled in the last few years. The UK has experienced similar issues as other countries when it comes to the average consumer’s ability to obtain more traditional credit options, such as credit cards or personal loans.
The combination of difficult to obtain credit and the rising cost of living expenses make it easy to see why so many more Britons are turning to payday loans, but in most cases it will do more harm than good.
That means that already struggling borrowers now have the added burden of having to quickly pay back a loan with an extremely high interest rate. This leads to very high incidents of re-borrowing, or rolling over the loan, when it is due.
With hundreds of dollars per loan being charged, if a borrower rolls over their loan each payday that can add up to thousands of dollars – just in fees and interest – each year.
There are many who want stricter limits placed on payday lenders. Some ideas include a mandatory cap on the interest rate, a limit to the number of payday loans borrowers can use each year and a required waiting period between loans.
The hope of those advocating such regulations is that it will allow borrowers to take advantage of the payday loans without the loans causing further financial problems.
There are others who want this type of loan banned altogether. If they had their way, payday lending in the UK would become a thing of the past.
While it is quite easy to see the downsides to payday loans, there are some consumers who say the loans have helped them through a difficult month. The key, says payday lenders, is not in further regulating the industry, but in educating borrowers about responsible use of payday loans.
For now, payday lending in the UK is big business. The best way to help consumers is to follow the advice of the lenders and educate them about dangers of using these loans irresponsibly.
