A payday loan is a short-term solution for emergency financial problems that need urgent attention. They might be used to replace an expensive appliance that you rely on daily in your household, or just simply be used to last until the end of the month if you’re struggling with your income.

Sometimes, you need a loan quickly and other methods of attaining a quick, valuable loan may not be viable. This could be due to not meeting the criteria of a business or bank loan, or just simply being rejected by another loan provider.

However, payday loans can help to solve short-term financial difficulties and enable you to manage until pay day arrives.

This guide to payday loans will tell you everything you need to know about interest rates, repayments and additional charges that you should look out for when taking out this type of short-term loan:

What are Payday Loans?

Designed to be a short-term loan that provides you with extra money quickly, a payday loan is an option if you’re looking to borrow cash until your next payday.

Typically, payday loans are taken out over a period of 30 days and are paid directly into a bank account of your choice. However, the duration of your loan is dependent on your financial situation, eligibility and management to pay it back, meaning it can be repaid over a longer period if required.

How Much Interest is charged?

Usually, there are two types of interest added on top of the original payday loan that you take out and the option you receive is dependent on your loan provider.

Representative APR is one form of interest and the percentage can vary from lender to lender. The good news is that because most loans use this standard way of adding interest, you can compare against other providers with ease.

On the negative side, Representative APR seems higher on a payday loans than on usual loans due to representative APR being based on yearly borrowings. This means that if you were to take out a loan for a few days, weeks or months, it could also come with a higher interest rate than one with daily interest.

For this reason, you may want to opt for a short-term loan provider that use daily interest rates. This is unable to exceed 0.8% per day (according to rules set by the Financial Conduct Authority), meaning that repayments of interest are more manageable – and cheaper if the loan is paid off quicker than planned. If you were to take out a loan of £100 over 30 days, your interest would not exceed £24.

You can work out the repayment costs for this (inclusive of interest) by using an online payday loan calculator. This type of tool can also display your monthly repayments depending on the length that you agree to.

How do Repayments Work?

Because the payday loan will initially be transferred into your account when it has been taken out, it’s likely that you’ll agree to monthly repayments coming directly from your bank within your contract. This means that the amount (plus interest) will be taken from your bank account as agreed, over the time that you agreed to.

However, it is possible to repay more of your payday loan than you agreed to with certain lenders, making it achievable to pay back the lender sooner than you think. Often, this happens in circumstances when the person’s financial status has changed, or that they receive a sum of money that they can use to reduce the amount they owe.

When taking out a payday loan, it’s important to check that your loan provider permits early repayments if this is what you’re hoping to achieve, and confirm that there are no extra charges for paying the loan off earlier than agreed.

Always remember that if your loan falls into arrears and you’re behind on your scheduled repayments, it could lead to serious financial problems. Your credit rating could be affected, leaving you with limited chances of becoming eligible for loans in the future.

How Much Money Can I Get Through a Payday Loan?

For a person who has never taken out a payday loan before, the initial loan that you’re able to take out may be limited to £500. However, the amounts that you are eligible to borrow depends on a variety of circumstances, including:

  • Previous financial activity
  • Credit rating
  • Affordability
  • The lenders criteria

You should take into consideration your likelihood to keep up with repayments in future and high-cost loans with a short-term duration should not be considered if you are experiencing financial difficulty.

If you require further assistance with pay day loans, get in touch with our team of financial experts today. We can help to provide advice on the most suitable solution for your own personal needs and recommend the best option for you.

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