Payday loans – What are they and how much do they cost?

In a perfect world, there would be no need, or no such thing as payday loans. But, as we all know, this is far from a perfect world!

So what are payday loans? How much do they cost? How do they work? What are the alternatives?

What are payday loans?

Payday loans are a type of short-term borrowing that’s meant to help you cover unexpected expenses or bridge the gap until you get paid.

They’re usually for small amounts, like a couple of hundred pounds and are designed to be paid back when you next get paid.

On the surface they seem, convenient. A small loan to help you make ends meet before you get paid again.

But they aren’t as convenient as you might think.

First, let’s cover the pros and cons of payday loans:

Pros:

1. Quick access: One of the main advantages of payday loans is their speed. You can often get the money you need within a day or even a few hours, which can be a lifesaver in urgent situations.
2. No credit check: Many payday lenders don’t conduct a thorough credit check, which can be helpful if you have a less-than-perfect credit history.
3. Convenience: The application process is usually quite simple and can often be done online.

Cons:

1. High interest rates: The interest rates on payday loans can be outrageously high. We’re talking about APRs (Annual Percentage Rates) that can sometimes be in the hundreds or thousands. This is because payday loans are short-term and considered risky by lenders.
2. Debt cycle: Due to the high interest rates and short repayment terms (usually around two weeks), some borrowers find themselves unable to pay off the loan on time. This can lead to a cycle of borrowing and accumulating more debt.
3. Hidden fees: There can be additional fees associated with payday loans that borrowers might not be fully aware of. These can include processing fees or charges for late payments.

What to look out for:

1. Interest rates: Always, and I mean always, check the interest rates and the APR. Make sure you understand how much you’ll actually end up paying back.
2. Repayment terms: Know exactly when you need to repay the loan. Missing the deadline can result in hefty fees.
3. Lender’s reputation: Research the lender before committing. Check reviews, customer experiences, and whether the lender is regulated by the Financial Conduct Authority (FCA).

How much do they cost?

Costs can vary widely, but to give you a rough idea, let’s say you borrow £200 for two weeks.

The interest could be around £50, and if there are any additional fees, you might be looking at around £250 to repay.

That’s quite a hefty chunk, considering you borrowed only £200 for 14 days.

That’s just an illustration of course, but you get the idea.

Alternatives:

1. Credit unions: These are nonprofit organisations that offer loans at much lower interest rates than payday lenders.
2. Personal loans: If your credit score allows, you might be eligible for a personal loan with a traditional bank or online lender. The interest rates are usually much more reasonable.
3. Borrow from family or friends: If possible, consider reaching out to loved ones for a short-term loan.
4. Emergency funds: This is why having an emergency fund is so important. It can save you from the need to take out high-interest loans.

In a nutshell, payday loans can be a quick fix, but they come with a hefty price tag and potential pitfalls.

I would recommend only using one as a last resort and only if there’s no alternative.

If you’re considering one, weigh the pros and cons carefully, explore alternatives, and make sure you’re fully informed before making a decision.

Your financial well-being is worth it!