Ruminations

While payday loans have been popular for a long time in the USA, they are a relatively new service for British borrowers, and a lot of people aren't sure precisely what they involve. With all the argument over whether they're a worthwhile service or only a type of legitimised scamming, it's a good idea for any UK borrower thinking of applying to realise precisely what they're signing up for.

Many of us are short of money towards the close of the month to one extent or another, and have to cut back a little by trimming down on socializing or other kinds of extra expenditure. This is an absolutely normal (if annoying!) fact of fiscal life for most of us who are employed and get paid once a month. Occasionally nonetheless, running out of cash can be more severe than this if there are essential expenses to be paid such as an unexpected bill or repair cost.

Many people utilize the overdraft facility of their bank accounts to provide a bit of leeway when funds are short, but today many people are permanently overdrawn and close to their limits, so this may not be an option.

A contrasting way of keeping you going until your next salary is to utilise a credit card, both for shopping and cash withdrawals. There are various difficulties with this, including the fact that credit cards are a less than inexpensive form of borrowing, and it's easy to build up a heavy debt which can have a fateful effect on your long term financial health.

If neither of the previous two options sound good for you you, then a payday advance loan may be worth looking at. In brief, these loans are available to more or less everyone with a bank account and a debit card, and who is working. When you take one out, the issuer will transfer the amount you apply for directly into your bank account, commonly within a day of your application being okayed. During your application you will have provided your debit card particulars, and the loan company will use these to automatically repay your loan on your next pay day, as well as their charges.

And in that lies one of the primary problems with payday loans – the expense.

This type of credit is notorious for being overpriced, and eye-watering interest rates of 1000% or even much more are widely encountered. These APR figures are perhaps a little misleading, as the APR system is designed for credit with a longer repayment term than wage advance loans where the term is measured in days rather than years. Even so, payday loans are quite costly, with a cost of 25% of the amount you borrow in the main the going rate.

The second major problem is that paying off your loan and fee is likely to leave you moneyless over again at the end of next month, and it's all too easy to get into an expensive downward spiral of taking out a loan each month – which is when those high interest rates will really start to have an effect.

So, is there any upside to a payday loan? Yes, but only genuinely for a true crisis where there is no other choice. If you're using these loans to pay for your everyday life, then it would be better to examine your spending and consider where you can save money, or to reconstitute your debt using a consolidation program or similar to free up some supplemental funds every month.

Martin writes for a fast payday loans provider in the UK, and you can read more about the pros and cons of wage advances at his site as well as applying online.