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What are payday loans?
Payday loans have attracted their fair share of bad press over the past couple of years. Well known for their expensive interest rates and high-profile cases of lenders handing cash out to people who couldn’t afford to repay, it’s likely you’ve heard of them before in some form.
But what are payday loans actually for? Is there any time where they could be useful, or are they really as bad as they seem?
Cash to tide you over between paydays
A payday loan is called such because it’s meant to be used to provide a little bit of extra cash between paydays.
For example, if you’ve got no cash left towards the end of the month but your boiler breaks down, a payday loan might be suitable to help you cover the cost to repair the damage before your next payday. Then, once your paycheck does come in, you can pay the loan off.
Seemingly high interest rates
As the loans are meant for short-term borrowing, perhaps a month or two at a time, the interest rates appear very high. This is because the APR representative is how much the borrowing costs in a year, including any fees and charges, rather than in a month. Because you’re only supposed to borrow the money for a short time, the APR is higher to make up for this.
However, many of the market leaders in the past got into trouble as they didn’t carry out proper checks to make sure the people borrowing from them could afford to repay. This resulted in people borrowing money, falling behind, and then being hit with late payment charges and high interest rates. This meant the debt quickly spiralled out of control.
Not only this, but many payday lenders charged very high interest rates that were unregulated. These high interest rates meant many borrowers were left trying to pay off the interest rather than the loan, and those who couldn’t afford to do so had their debt slowly build up until it was impossible to pay back.
A changed industry?
Because of this bad press and large fines imposed on some of the top payday lenders, the industry has changed. These days, most lenders have stricter checks in place when you apply, and the interest rates are much lower than they were before.
Although the rates are lower, like with any credit it’s important you weigh up how much you’ll pay in interest before you take out the loan. Some of the payday lenders have tools on their website to help you figure out how much interest you’ll pay over the course of the loan.
It’s worth weighing up all of your lending options before committing to one. Perhaps give some thought to other options like a personal loan or credit card, as these could offer a more affordable solution or one that’s suited to your situation better.
Payday loans do have their uses, and can be helpful in the right circumstances. If you’re only borrowing for a couple of days before your next wage arrives, they might help you when you’re in a tight spot.
But if you don’t know if you’ll have the money to repay in a few days, or if you know you won’t, you should avoid taking out a payday loan at this time. Although the interest rates are more reasonable now, they are still expensive, and a small loan can quickly build to an unaffordable debt if you don’t pay it all back.