How Do Payday Loans Actually Work?

There’s been a lot of controversy in the financial world over the last couple of years when it comes to things like short-term loans, or payday loans. Although they appeared to be almost everywhere in the media for a while, with new companies constantly cropping up to give people access to the finance that they need while they wait for a pack check to come through, many problems arose when people realised that the interest they were expected to pay for borrowing just a tiny amount of money was astronomical.

Since the time of the very first payday loans, changes in regulations have been put in place to prevent short-term loan providers from taking advantage of the financially vulnerable as much as they once did, with loan terms that couldn’t possibly be repaid, leading to huge amounts of debt. However, because they are still a feature in today’s financial world, it’s important to make sure that you understand what payday loans actually are, if you’re considering your lending options.

What is a Payday Loan?

First things first, a payday loan is simply a short-term loan that was originally designed as a solution to help tide people over financially if they are struggling with expenses before their payday arrives in any given month. Some payday loan companies offered consumers the opportunity to choose their own period for repayment, depending on when they received their salary, and how they could use their money appropriately for the comfort of themselves and their family.

Payday loans became popular very quickly, because they were accessible to a host of different people from different backgrounds, and often didn’t require a great credit history to access. In most cases, payday loans were sent straight to an applicant’s bank account within around 24 hours of their application being approved. From that point, the repayment, plus the interest that you had generated on that loan, would be taken out of your bank account on the due date.

Today, the advertised interest rates and actual APR charged on payday loans are much lower than they once were, but they can still be very high. Typically, payday loans charge around £24 a month for every hundred pounds that you borrow. This can mean that some people still take out payday loans and struggle to pay them back according to the schedule or terms that have been laid out for them.

Logbook Loans vs Payday Loans

Some people wonder whether logbook and payday loans are the same thing, but the truth is that they’re actually very different. Logbook loans are a type of secured loan that mitigates risk by using your vehicle as backup, so if you cannot make repayments for any reason, then you might find that you end up losing control of your vehicle, on top of being required to pay back extremely large interest charges. Because there are usually no credit checks involved with logbook and payday loans, customers who are struggling with debt and history problems can often be tempted by these loans, but they may also put their finances and vehicles at risk.

The Alternatives to Payday Loans

In cases where you feel that you’re absolutely desperate for cash, it can sometimes feel as though payday loans are the simplest, or even the only option that is available to you. However, most of the time there are other options available that can be far less risky and detrimental to your overall financial health.

For instance, there are such things as “current account authorised overdrafts” which are often much cheaper to access than payday loans if you’re interested in borrowing money for only a short amount of time. However, unauthorised overdrafts are often more expensive than you would expect, so it’s important to avoid those at all costs if you’re looking for quick and easy ways to access small amounts of money over a short period of time.

Another option that could be available to some people in search of financial help, could be to join up with your local credit union. Although the loans that can be issued by credit unions can take much longer to set up and arrange on your behalf, the APR is limited to a maximum of 42.6%, compared to percentages in their thousands with payday loans.

Most of the time, even the specialist credit cards that are aimed specifically at people with a damaged credit history can offer a better deal and lower interest rates than payday loans. Even if you’re given a high APR of only 30%, you’ll still probably pay far less interest with this type of credit card, particularly if you are disciplined enough to make sure that you pay off your balance quickly. Of course, if you only make minimum repayments and miss payments, then you could face penalty charges and damage to your credit rating.