Introduction
Conventional wisdom dictates that to accurately compare loan deals you should look at the APR, or "Annual Percentage Rate". If you look at the APR of a typical payday loan however, it's likely to be enough to make you keel over on the spot or sending you running to the hills. Payday loan companies charge apparently preposterous interest rates – an APR of 1,500% or 1,800% or more is not uncommon – but you should remember that because you are borrowing over a period of weeks or months rather than years, this is misleading. In fact the interest charged on a payday loan may be less than the charge applied by a bank or building society for exceeding your arranged overdraft by a few pounds. Huge APRs are necessary to make payday loans a viable proposition for lenders, who need to recoup administration costs in a very short period compared to conventional loans.
Payday Loans Pros & Cons
Payday loans are typically fast, require no security, and are not subject to credit checks; if you can prove that you have an address, a job and a bank account you can be approved for a payday loan in a few minutes, and usually receive funds the same day. Now, this is likely to be fine if you are a responsible individual, capable of paying back the loan in full in a few weeks' time without affecting your financial future. You borrow money in the short-term, to pay an unexpected repair bill or holiday expenses for example, and pay off the loan plus the interest accrued – typically between 10% and 25% of the total amount borrowed – from your next wage packet or salary payment.
However, if a payday loan is an act of desperation – if you've maxed out your credit cards and other lines of credit, or "robbed Peter to pay Paul" – you may find that it is the route to financial ruin. Quite simply, if you know that you cannot repay a payday loan in full, on the date required then don't apply for a loan in the first place! It may seem like a short-term fix, but come payday you'll find that the unpaid loan, plus additional charges is "rolled over" to the following month and so on, and so on. You may be better off taking a cash advance on your credit card, if possible, or borrowing money from family or friends or even pawning some valuables as a means of raising extra cash in these circumstances. Another possibility, of course, is to approach your creditor(s) and explain to them that you are experiencing financial hardship, and to suggest an alternative repayment plan; many creditors are likely to be sympathetic to this approach.
