Payday Loans

A payday loan a facility which has become increasingly popular in recent years is a small, short-term loan that is intended to cover a borrower's expenses until his or her next payday. This is similar to a credit card’s facility to enable cash advances, although in the case of a credit card it is provided against a pre approved limit.

How does it work?

The payday loan has had some adverse publicity due to some lenders charging excessively high interest rates on such loans. However borrowers are often less interested in this aspect as the time the loan is outstanding is usually very short and hence the difference in actual interest paid is relatively small.

The interest charged is calculated on a compounding basis. Most payday loans vary in interest rate from about 17.5% up to 35%. While the actual interest is not excessive at the lower end, the rate when calculated over the full life of the loan can rise to well over 100% per annum due to the compound nature of the debt (interest is calculated daily and added to the amount borrowed).

A person seeking to take out a payday loan will need to visit a payday lending retail premises where application is made, although these days many providers will receive applications online (see later). By definition the repayment of the loan is due in full at the borrower's next paycheque (or direct deposit into their bank account) and usually applies to a two to four-week term.

In practice the borrower will have to have a direct debit facility set up at their bank for the full amount including interest and fees, before actually receiving the funds on the payday loan. Some payday operators will require the borrower to be present in person when repayment is due.

How do people use Pay Day loans?

Today with the ubiquitous use of internet some pay day loans can be applied for online. The lender will want the kind of personal information that any lender will want to see and include:

Personal details: conducing address, age, marital status and more.
Bank account numbers and copy bank statement.
Employer information.

Pay Day loans are used by people who are unable to meet pressing debt situations. Although it is only anecdotal, the evidence is that many users pf Pay Day loans need money to pay utility bills or risk utility services being cut off. Some will need the funds to meet rent or other housing costs and others will be needing the funds to pay for goods that may otherwise be repossessed. Many people using payday loans have a bad credit rating with a credit bureau.

Often younger people who are unable to get a credit card due to their lack of repayment history are forced to seek a payday loan in order to meet their living expenses. In the case of people without a credit card or personal loan the risk of a pay day loan is that failure to meet the repayment can result in a default notice being referred to a credit agency and hence result in a bad credit record.