A payday loan affords you the ability to borrow funds quickly for a short time. Typically, payment with interest is due by the end of the month, our next payday. But, more and more lenders are offering more extended repayment as an option.
Regardless of the loan or the lender, all payday loans are high interest and expensive vehicles for borrowing money. The APR for this type of loan can be as high as 1500%, a full two thirds more in percentage than the average credit card at just under 23%.
The Financial Conduct Authority (FCA) rules impose a cap on the cost of payday loans, limiting the amount of default fees and interest they can charge.
This type of loan has traditionally been considered to be favored by consumers with limited resources and poor credit standing. That does seem to be changing, however.
A Recent Analysis by Money Gap showed a decrease in applications of 14% to 25% from retail staff, military and factory workers, manual labor jobs, and those in hospitality. Applications from the telecom and utility industries as well as education, appear to be relatively flat.
But, here is the surprising result of their analysis; since 2015 mid-level and senior-level managerial positions have accounted for a 19% increase in these short-term loan applications.
Any decision regarding the borrowing of money should be taken very seriously. The added payment may cause other financial issues and limit your choices in the future. With a payday loan, these unintended consequences can be challenging to avoid.
A payday loan is the most expensive way you can legally borrow money. The terms of these loans and the fees associated can quickly take you over in the event that you cannot repay on time.
Extending the loan or rolling it over carry additional costs and create the potential for financial disaster.
In August 2018 the Oxford Academic published a study about the effect of payday loans on borrowers.
What they found is sobering.
Within six months these consumers applied for additional credit, both in personal loans and credit cards. The likelihood of delinquency on these other debts also increases, as does the probability of exceeding overdraft limits. All of this results in a decline in the consumer’s credit score creating further financial difficulty.
Fortunately, regulations provide for a change of heart. You are allowed to withdraw from the contract any time during the first 14 days. You will pay the interest for the time you held the money, but additional charges must be refunded.
If you are looking at a payday loan, make sure to explore other lending alternatives. A personal loan through your bank or credit union might be a better option. Even using a credit card is less expensive and every bit as quick as a payday loan.
The interest rate on your most expensive credit card will be less than a payday loan.
But, if a payday loan appears to be your only option, make sure that you shop for the most favorable terms. Most importantly, make sure that your financial situation will allow you to repay the loan on time.