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Payday Loans: The Beginner’s Guide

Strapped for money, but have to MOT your car? Just a week left to payday and you have no food in your fridge? Run out of money for childcare, but you can make money only if your kids are looked after?

Many people in such situations often turn towards payday loans out of desperation. This is a swift and easy way of getting your hands on some ready cash at a very short notice.

Individuals who use payday loans typically think that they “can” and “will” pay the cash back within the agreed period of time.

But, be warned, as in most of the cases, people find out other demands on their cash as soon as they are paid. So, they either extend the contract or, even worse, take out another loan.

But the decision of taking out a payday loan should never be taken up lightly. Also, there are a few things which you have to be aware of before you end up signing on those dotted lines.

Always remember - the most crucial rule of payday loan is:

You should only take out a payday loan if you know that you’re capable enough to repay it rapidly and aren’t putting yourself in further debt in the following month. Or else it can turn out to be the trigger that sends you into a debt spiral very fast.

It is always said that “’knowledge is power” and this is especially true when it comes to payday loans. So, have a good read of this guide, which should help you comprehend what you may be getting yourself in for.

What is a Payday Loan?
Payday loan, at times called as money advances is short-term borrowing that comes with high interest rates. These loans are a short-term solution to instant, temporary cash problems. A payday loan will give you a quick injection of money to help you out till your next payday.

Certain providers give you the liberty to fix your repayment date, but the term is generally less than a month and straight after you have been paid the money.

When your payment is due, the loan along with the interest is taken out directly from your bank account, whether you’re able to afford it or not.

With a payday loan, you need to be especially aware of approving a “continuous payment authority” that permits the provider to keep applying for cash even when there’s isn’t sufficient amount in your account, thereby exposing you to extra charges from the bank.

What is the Damage?
In 2015, a new set of rules and regulations were brought in. This was to restrict the amount which could be charged for a payday loan to £24 per £100 that was borrowed, provided the loan was taken out within 30 days and repaid on time.

Legislation also mentions that the sum total repayment must never be more than twice the actual amount borrowed. These figures alone must give you a rough idea as to why this type of borrowing isn’t a wise decision in terms of cost.

Why Are Payday Loans So Eye-catching?
A payday loan is specifically appealing as it can be applied for, accepted and paid directly into one’s bank account swiftly - which is typically within 24 hours and at times even within minutes.

Also, you do not have to hop through all those hoops, like background checks, which is generally required by providers to get one. You could even apply for payday loan using your smartphone, so that it becomes accessible to you, day or night.

What Are the Usual Repayments?
The interest rate applied on a payday loan is way higher in comparison to other types of credit. Typical APRs for these loans could be in thousands, as payday loans are intended for short-term repayments, instead of over a year.

If you aren’t able to make the final repayment, you might well be offered an option to roll over the debt to the next month. Bear in mind, whilst everyone would love a lottery rollover, this kind of rollover could perhaps lead you to a considerably higher interest rate and charges, which would result in higher repayment.

Here is a small example to show what you might be in for: if you borrow £300 from a payday provider and the loan amount has a representative 1295% APR. If you are not able to pay if off right away, and you opt to pay it off over a four month period, the sum total that you’ll pay back is £722.

So, on taking a payday loan of £300 you’ll end up paying more than twice the actual amount back. Bear in mind, if you know that you won’t be able to afford to pay off the loan on time, then it’s better to avoid payday loan at all costs.

Getting a Bad Rep - Do Payday Loans Damage Your Credit Rating?
Sadly, regardless of what providers would have you believe, taking out a payday loan could probably harm your credit rating, especially when it comes down to applying for a mortgage.

Also, once you have borrowed and paid your debt back, you will for sure be on the lenders hit list for future offers to entice you back to the dark side.

Do You Need a Payday Loan?
Many individuals who take out a payday loan do so as a last resort when they’re in dire need to get their hands on some money on short notice. This won’t be something new, as all of us would’ve been in such a situation at least once.

But, a payday loan must only be taken out if you’re absolutely sure that you’ll be able to pay the entire amount of cash back that too within the set period of time and more importantly, without landing yourself in the same position next month.

What Are the Alternatives to Payday Loans?
Sanctioned overdrafts on the present accounts could prove to be a great alternative to a payday loan, since banks are often keen to provide short term loans. The charges and rate of interest on an overdraft extension is usually a lot lower in comparison to a payday loan.

You can even take credit cards into consideration, but most of the firms charge a fee on money withdrawal.

Yet again, be cautious when you’re using your credit card to plug the hole, you ought to consider the overall expense, which mainly includes interest rate and charges, especially if you’re not able to pay the entire amount off within the first month.
Likewise, do check for a Payment Protection Insurance (PPI) policy on your credit card; if you have one applied on your loan, then you can claim for PPI Refund to get compensation.

Another alternative for payday loans could be to ask your family members or friends to help you out. Otherwise, if you’re on some income related benefits, you could even apply for a budgeting loan for important items.

If you don’t want to ask your loved ones to help you out by offering a loan, there are certain employers who could possibly offer a short-term loan, especially if your reason behind borrowing money is to cover travel expenses to work or childcare.

Unions can also be able to arrange a loan for their members, so you often have numerous other alternatives available before you consider a payday loan. It really has to be your last resort and shouldn’t be taken lightly at all.

Next Step
Now that you’ve read this guide regarding payday loan, please do stop and think at least twice before you end up applying for one.

Ask yourself, “Can I pay off the amount I've borrowed, including the interest rate and fees, in the proposed time frame, without coming up short the next month?”

If your answer to the above question is “No”, then steer clear. You should consider other options or else you might land on a slippery slope of payday debt.

If you still feel that payday loan is the only option you’re left with and you’re finding it difficult to pay off any credit lines or loans, then it is advisable to seek assistance from professional debt advice agencies before you take out one.

Also, if you’ve already taken out a payday loan, you might be entitled to certain refunds.
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