How a Payday Loan Works
As the term suggests, a payday loan works on the fairly simple and straight forward principle of lending on the basis that the amount borrowed is repaid on or around the borrower’s next pay day.
Strictly speaking, though, any such cash advance may be made regardless of the individual’s current employment status, with the advance simply representing a short-term loan.
Short Term Loan
The following are some additional facts about payday loans and the way in which they work:
- an estimated 2 million people in the UK borrow some £1.8bn a year by way of payday loans, according to a BBC news item;
- the same source cites findings by the Office of Fair Trading (OFT) that this type of short-term loan might be viewed as a reasonable alternative to incurring an unauthorised overdraft from the bank, at a time when household finances are under pressure and banks have restricted the availability of credit;
- the OFT also reports that there are some 240 payday loan lenders in the UK;
- this might make your choice of lender somewhat difficult, although the more reputable, such as www.wonga.com, are not only licensed and registered by the OFT but also subscribe to the industry’s codes of practice – for example, on responsible lending;
- as part of that responsibility, such lenders also go out of their way to be entirely transparent about the cash advances they offer – in terms of the amount borrowed, the interest accrued (and its representative APR), the set-up or money transfer fee, and the total amount, therefore, that needs to be repaid on the clearly defined repayment date;
- an official, government funded organisation the Money Advice Service, cautions against the use of payday loans as a way of financing on-going everyday living expenses, but by no means rules them out as a helpful source for funding emergency expenditure – such as essential repairs to your car – in order to avoid still further expenditure at a later date;
- the same advisory service also points out that all payday loan lenders are required by law to conduct a credit check on prospective borrowers and satisfy themselves that any cash advance is going to be repaid on the agreed date – despite the fact that some unscrupulous and less than reputable lenders claim that no credit check is undertaken;
- restrictions on the availability of credit – including payday loans – and the duty of lenders to do so responsibly is, of course, a reflection of the difficulties faced by those for whom problems with debt are already, or are in danger of, running out of control;
- if this is something about which you might be worried, you may find help in the government’s guide about options for paying off your debts;
- here you may find helpful advice about debt management plans, court claims, debt and bankruptcy;
- if you have been looking for a payday loan but fallen prey to an illegal, unlicensed moneylender, this is also the website through which you are able to report a suspected loan shark.
Though payday loans work simply in principle and are straight forward to arrange, as with any kind of borrowing, it may be worth remembering that you do so responsibly.