A payday loan is a short-term loan ranging from £80 to £750 that is intended to bridge a borrower's cash flow gap between paydays. Payday loans are often used to avoid punitive bank charges, or to cover one-off short-term expenses such as unexpected car repairs. Payday loans are usually only available to individuals in full-time employment, and who earn £750 plus per month.
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If you find yourself seriously strapped for cash, you may consider applying for this type of short-term loan. Individuals may borrow to pay off unexpected bills, or for holiday spending money, with the typical loan amount applied for being £200.
Once you are approved for a Payday Loan, the cash is deposited directly into the borrower’s bank account, and is secured by the individual’s next pay. The loan maturity date usually coincides with the next payday (on average 30 days). On this day the lender debit’s the borrower's account, and receives the loan principal amount, plus the accrued interest, which can range from 10-25%, depending on the payday loan provider.
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In general, in order to be approved for a payday loan you must meet the following criterion:
• Be employed on a full-time basis
• Earn a minimum of £750 per month
• Have a UK bank account with a debit card linked to it
• Some payday providers such as PaydayUK restrict repeat borrowing to prevent long term usage
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Last month Mr. Jones made seven purchases totaling £96.50 using his debit card. He was not aware that he was already overdrawn and incurred overdraft service changes, from a high street UK bank, amounting to £140 (£20 overdraft fee x 7 transactions).
The following month Mr. Jones decided to meet his financial shortcomings with a £100 payday loan. Under this scenario, his payday provider only charged him £20 (assuming interest rate is approximately 20%) in total for a £100 loan as oppose to being charged an overdraft service fee for each additional transaction.
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One of the most advantageous features of a payday loan is the speed of transaction. Compared to an (un)secured loan application that could take up to 28 days (or more!) to process and approve, a payday loan can be approved immediately, and cash deposited into a borrower’s account in as little as 24 hours.
Other payday loan benefits include convenience, ease, and confidentiality. These benefits are reflected in the cost, or loan interest rate, which is higher than longer-term loan interest rates.
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The APR (annual percentage rate) on a payday loan is higher compared with conventional, longer-term loan interest rates. This is because of the costly administration charges associated with processing payday loans. For instance, a £100, one-week loan, at a 20% APR (compounded weekly) would generate only 38 pence of interest, which would fail to match loan processing costs.
Payday loan companies are legally obliged to quote APRs, which can be as high as 1500%, but it is important to know how to interpret these rates and to realize that most individuals never pay the annualized rate because they are only borrowing for a month, and not every month for one year.
Tip: If you know that you are going to fall short financially, month on month, it may be best to apply for a longer-term, conventional loan, and borrow the absolute minimum via a payday loan to cover the interim period while the conventional loan is processed.
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For more information on payday loans, check out:
PaydayUK, the largest provider of payday loans.
Payday Express, get your pay today with Payday Express!
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