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Payday loans: what are they and how do they work?

A payday loan can be a great option if you are in need of financial assistance at the end the month.
Payday loans are expensive and can lead to debt traps.

What is a Payday Loan?

Payday loans, which are short-term loans with high interest rates and are often used to help people for a limited time, are not long-term loans. These loans are sometimes referred to as HCSTC (high-cost, short term credit), because although they can be very convenient and approved quickly, the cost of borrowing such loans can spiral quickly.

Payday loans in the UK can charge an interest rate maximum of 0.8% per day, but the average APR on payday loans is 1250%, which is much higher than the credit card’s 20.7%.

HCSTC loans are a common example of predatory lending due to the rapidly increasing amount of interest that people may have to pay.

Although 4/5 of these loans can be paid off within a month, there is still a lot at risk. There are safer and cheaper ways to borrow money.
What is the process of payday loans?

Payday loans are not completely unregulated. It is important to shop around for payday loans. Payday lenders are required to publish rates on at least one price comparison website.

Online and in-store payday loans are available. Before you can be approved for the loan, ensure that the lender has the funds to repay it.

It is important to understand how the loan will be repaid, what a continuous payments authority (CPA), and when the loan will need to be repaid.

After you receive the loan, you will be charged a daily rate of interest that will continue until the loan is repaid.

Lenders will first look at a CPA to collect repayment. This will extract payment from your account details. This means that you grant permission for the lender to collect payment. Usually, this happens within one month. Lenders shouldn’t try to collect more than two payments and they should not request part payment.
Payday loans: The pros and cons

Payday loans are a way to provide emergency credit for people who suddenly need it. Although there are some risks, 4 out 5 payday loans can be repaid in a month. What are the benefits and drawbacks of payday loans?
Payday loans have many advantages

Payday loans have the advantage of being quick and easy to access. When you request a payday loan UK, there are far fewer hurdles to overcome. They are intended to be repaid when you receive your next salary payment. Your repayments will be automatically taken at the same moment.

Payday loans are simply a way to pay your next salary. HCSTC loans may be called cash advances.

A payday loan is available to anyone with a good credit rating. While you may need to have a good credit rating to get many loans, payday loans are not required to have a high credit score. You just need to show that you have the ability to repay payday loans.

Although you don’t have to have good credit to get a HCSTC loan application, your credit score may be affected.
Payday loans have their disadvantages

HCSTC loans are useful for those in dire need, but the risks and disadvantages associated with these loans are well-documented.

Borrowers can fall into a debt trap because of the high fees associated with payday loans. The Financial Conduct Authority found that 67% of payday loan borrowers are in debt, compared to 15% for adults.

Due to rapidly rising costs, the longer the borrower goes without repaying the amount due, the higher the spiralling costs can become. This makes it extremely risky for those who don’t have the means or simply cannot afford the repayments.

Payday loans can have an impact on your credit score, as we’ve already mentioned. Different credit reference agencies, borrowers, and companies calculate credit scores differently. This means that some companies may still view you negatively even if your loan is repaid in full.

However, lenders may not be able to distinguish between the loans you have made. Just because you need extra cash at short notice does not mean that you aren’t a reliable borrower.

There is always the possibility that your loan repayments or even taking out a loan may be considered negative.
What are the alternatives for payday loans?

Payday loans are not the only option. There are other options that can be used. They are safer and less likely to trap you in debt. You might consider other options if you are already in debt and don’t think you can repay the payday loan, or if you simply want another source of finance.
Consolidate your debt

Individuals and businesses can borrow money to get a little more.

Consolidating your debts that have variable interest rates and repayment dates may be a good idea. Refinancing or debt consolidation is a way to consolidate all of your existing debts into one monthly installment, making it easier to pay them all off.
Your overdraft should be extended

You might be able extend your overdraft with the bank if you need only a temporary solution. An agreed overdraft threshold may be set that allows you to pay off your outstanding debts within a reasonable time. Even if you do not have an agreed overdraft threshold, the daily fees for an overdraft lender are usually less than those charged by payday lenders.
Seek out a credit union

Credit unions are cooperatively managed organizations that aim to provide low-interest credit to those who need it. The unions exist to assist members in saving and borrowing and will often offer a payday loan with lower interest rates.

Credit unions cannot charge higher interest rates than they can afford. This is only true for short loans.
Save and budget

It’s possible that you don’t even need to borrow. 61% of payday borrowers are not confident with managing their money. It’s no use borrowing if you won’t be able repay it.

Although it is not always possible to budget for all your needs, there are some principles that can help you plan ahead and save money for any eventuality.
Plan your finances

Financial advisers can help you plan for your future. No matter what your financial goals may be, getting the right financial guidance will help you avoid borrowing and keep your finances in order.