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How do payday/short term loans work?
These are straightforward, easy-to-access, fast but expensive loans for relatively small amounts, where the sum borrowed accrues daily interest of up to a maximum of 0.8% – that’s 80p per £100 borrowed. Borrowers will usually make monthly or weekly repayments which consist of the interest accrued so far plus a chunk of the outstanding capital.
Payday loans, along with other short term (a year or less), unsecured personal loans where the APR (annual percentage rate) is 100% or higher are classed as “high-cost short-term credit” by the Financial Conduct Authority (FCA), which regulates the market.
Under the FCA’s rules, lenders can’t charge more than 0.8% interest daily and the total cost of repaying the loan can’t exceed the original amount borrowed – so if you borrow £100, the most you’ll ever have to pay back is £200. Any fixed fees (for example a fee for missing a payment) are capped at £15.
You generally won’t see high-street banks providing these loans. A number of new, predominantly online companies like Wonga and QuickQuid found success in the early 2000s offering payday loans over the Internet.
Payday and short term loans are much easier to get approved for than a longer-term personal loan from a high-street bank, because you don’t need to have good credit. However, they’re an expensive method of borrowing, so you should explore other options before you take one out and only use them for essential one-off expenditures. With the costs involved, they’re not a good idea for borrowing over longer periods or for sustained borrowing.
How do I repay the loan?
Generally lenders will schedule the payments for on or just after your payday. Some offer the flexibility to make payments weekly or fortnightly, if that’s how you receive your income.
In most cases, payday loans and other short term instalment loans are repaid using a continuous payment authority (CPA). That means funds will be automatically taken from your account on the scheduled day(s).
Some lenders accept payments by other means such as direct debit or a manual transfer.
Although the lenders don’t charge a fee to set up the loans, fees of up to £15 can be incurred if you don’t make payments on time. Late payments will also damage your credit rating and therefore your ability to borrow in the future. You should only consider a payday or short term loan if you’re certain you’re going to be able to meet the repayment schedule.
What is a Continuous Payment Authority (CPA)?A CPA is a payment arrangement in which you give a company permission to withdraw money from your account on a reoccurring basis. CPAs differ from direct debits because they give the company being paid the ability to withdraw money from your account whenever they wish, and to take payments of different amounts without consulting you. Most payday loan companies will use CPAs to collect your repayments, though you can cancel this at any time by consulting with either your lender or your bank. If you do cancel a CPA, make sure you arrange to make repayments by another means. If you miss a repayment it will affect your credit score and potentially cost you extra in fees and additional interest.
How should I compare payday loans or short term loans?
When you’re in urgent need of money, even a bad deal can look good. Be sure to compare lenders to get a loan with the best rates that fits your needs. Here are some things to consider:
What is APR?The annual percentage rate (APR) is a measure designed to help consumers compare loans from different providers. However, APR alone should not be used to decide on a payday or short term loan – it is important to consider other factors such as the total amount repayable.
All payday or short term loan providers must calculate the APR of their products and services using the same calculation. It’s calculated based on a one-year term (even if the loan is only for one month) which can make already-high rates seem even higher. It also takes into consideration both the interest and charges.
How to tell if a short term lender is legitimate
With new payday loan companies emerging all the time, these pointers can help you find legit short term loans easily:
In our comparison table, we only include direct lenders that are authorised and regulated by the FCA.
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