How do payday loans work?
A short-term cash advance, a payday loan is offered based on your credit profile and current income and is typically considered when other methods of borrowing are unavailable. If you take out a payday loan, you’ll be charged high interest rates in exchange for being provided with an immediate, short-term cash loan.
Reasons and risks
While they are relatively easy to get, when it comes to taking out a payday loan, it’s well worth fully understanding the reasons people take them out and the associated risks before you apply. The specifics around each of these will differ depending on the loan provider, but for the most part, the same rules apply.
People generally take out a payday loan because they need money quickly, and need to know that they don’t have to pay it back until the next payday. The key here is making sure you can afford the repayment(s) before you apply – as missing a payment can quickly spiral into a dangerous financial situation.
Beware that no matter which company you apply with, you’ll pay back much more than you borrow and also face fees if you miss the repayment date. Those who opt for a payday loan are typically limited in terms of financial flexibility – which is likely why they’re considering this method of borrowing. This can lead to an inability to meet repayments and the lender finding themselves needing to borrow from other sources to meet the minimum payments on their payday loan.
Applying for a payday loan
There’s a lot of advertising surrounding payday loans, placing them as a quick-fix financial solution. Rather than allowing yourself to be influenced by advertising, do your own independent research into loan types (check out our brief guide to loan types on our homepage) and decide if a payday loan is the best option for your situation.
If you’ve decided that a payday loan is the best option for you, you’ll want to shop around to find the best deal for your specific needs. Remember to read the small print and make sure you’re fully informed of the repayment terms and conditions before you apply to avoid surprises once you’ve signed for the loan.
Payday loans are available from high street shops and online and you’ll most likely need to provide payslips to prove your current level of income. Credit score and history can influence the terms of the loan – so it’s well worth thoroughly assessing your credit report before applying.
Paying off your payday loan
Before taking out a payday loan, you’ll need to think about how you’re going to pay this back. Are your outgoings particularly high this month or do you expect to be in the same situation next month? If it’s the latter, how will you afford the extra output to pay off the loan?
If you’re confident that a payday loan is the best option for you, set yourself a reminder of the repayment date and ensure you pay the loan back in full to avoid getting yourself into a difficult financial position.
The Jolly Good Loans blog is full of helpful financial tips and advice, and remember, if you’re having financial difficulty, there is help available. Head over to the Citizens Advice website or call the free national debt helpline on 0808 808 4000.