It’s often an uphill struggle to make the monthly wage stretch a full four weeks. At this time of year the additional pressures of Christmas, the long cold days of January (when the early pay day in December begins to seem less and less like an early Christmas treat) and sudden and unexpected bills when the boiler or the car breakdown can make December a difficult time. In the last few years one solution has presented itself in the form of the short term ‘pay day loan’. While these loans have come in for some criticism, from both politicians and charities, they have also become increasingly popular with those who don’t earn several thousand pounds a month, without taking expenses claims into account. With budgets stretched closer to breaking point at this time of year than normal, you may be considering the decision of whether or not to take out a pay day loan; if you are in this position, what do you need to know?
What is a Pay Day Loan?
The term pay day loan has become common in the UK in the last few years and most of us understand the basic idea. In effect these are small, short term loans that are designed to be paid out of your next wage. In most cases, the amounts can range from as little as fifty to as much as a thousand pounds; like normal loans the amount and the terms of the loan will depend on your circumstances. The big attraction of the pay day loan is that they offer almost instantly available cash, if your loan application is successful and the applications themselves are usually online and very quick to fill in.
Who’s Afraid of the Big Bad APR – and what is it Anyway?
The instant nature, the short term of the loan and the fast repayment all mean that this is one of the most expensive types of credit available. This is not because lenders are trying to take advantage of those in need of a fast injection of cash but simply because lending for short periods would be uneconomical without a reasonable return on the loan. If you’re a stranger to terms such as APR then it can be confusing when you hear terms like 2000% APR and the high interest rates on short term pay day loans is one aspect that has attracted the most criticism. In actual fact APR refers to the annual percentage rate – this means that if you borrowed £100 for a year at this rate you’d have to pay back many times that amount in interest. In terms of the realities of pay day loans this misses the point – in reality the loan is designed to be short term and you should only pay back a reasonably small amount above what you have borrowed.
So who should consider taking a pay day loan?
The biggest danger with the pay day loan is that you can’t afford to pay it back when it’s due. This is when you may incur penalties and additional charges. As stated above, the high interest rate means that you’ll pay more in interest the longer the loan is outstanding. Some firms, but not all, also charge an early repayment fee. The rule is to check the small print, the fees and additional charges for paying either early or late. Pay day loans are not the best way to manage from month to month, but as Christmas looms, sudden unexpected bills, can play havoc with your carefully planned budget. If you do need to pay out for a faulty car, a higher than expected bill or other domestic emergency, a pay day loan can offer you a simple way to adjust your budget and pay for the bill now, spreading the cost out of the next couple of months wage.
How Much Should I Borrow?
It’s important to borrow no more than you can afford to repay. You may be able to borrow up to £1000 but, even if that is the case, ask yourself if you really need this amount. You should also consider carefully how it will affect next month’s budget, and will you need to take out another loan to get you through the following month? Finally, consider what is the money for? If it’s a car repair, ask if the mechanic can take half this month and half next. This can reduce the amount you need to borrow and give you more chance of managing to balance the books, next month. If you are struggling to pay an energy bill, contact your supplier and explain your circumstances. Energy suppliers are strictly regulated and will attempt to help you manage the costs as far as is possible. Before considering a short term loan try all other avenues to postpone, or split bills into more manageable chunks. If necessary you can still consider a pay day loan, in order to make the immediate future easier, but always aim to borrow as little as possible on the best terms that you can find.
Will is a freelance writer who specialises in small business, personal finance and micro-loans, including pay day loans UK.