Payday loans are products that have been much maligned in recent years, but the industry has certainly cleaned itself up. Gone are many of the hidden charges and astronomical interest rates, and in their place, short-term lenders are focusing on providing a fast and flexible service with transparent pricing that makes it clear exactly how much borrowers must repay.
But does that mean a payday loan is now a product the average consumer can consider and what should you take into account before you apply?
When might a payday loan be a viable product for you?
You should only ever access a payday loan when you have an urgent expense that you cannot afford and you need to borrow money over the very short-term. For example, if your car breaks down and it’s essential for travelling to and from work, that would be a potential reason to access a payday loan. In that case, you clearly need to borrow money very quickly, but you should still take the time to check that you’ll be able to repay the loan in full by the repayment date. The short-term lender Wonga provides more information here about when a payday loan might be an appropriate product to use.
There are also other products that may be worth considering before you apply for a payday loan. For example, could you borrow the money on a credit card at a cheaper rate or do you have a prearranged overdraft you can use? Alternatively, could you borrow from family and friends? Although many people are hesitant to use this option, it will give you access to cash at a far cheaper rate.
What should you think about before you apply?
- How much money do you need?
When you’re paying a high rate of interest on a loan, that last thing you want to do is borrow than necessary. Limited-time loans are an expensive form of credit, so always calculate carefully exactly how much you’re going to need. In the above example of a broken-down car, call the garage and get a quote before you apply for the loan.
- How much can you afford to repay?
Now you know how much you need to borrow, you can use a loan affordability calculator (like this one) to calculate how much you can afford to repay to determine the term of the loan. Ideally, you will be able to repay the loan by the time you receive your next pay packet, hence the term payday loan. Even if you can’t repay the loan in full, you should still repay it as quickly as you can to reduce the interest charges.
- Have you read the terms and conditions?
Every time you take out a loan, it’s essential you read the terms and conditions very carefully. Every lender that’s licensed by the regulator in your country will have a broad set of rules they must follow, but each lender will still have their own terms and conditions within those rules. If you feel uncomfortable with any of the terms and conditions, do not apply for the loan.
What is your experience of payday loans? Have you ever found it to be a genuinely useful product? Please share your thoughts with our readers in the comments below.