A VIDEO GUIDE TO PAYDAY LOANS | HOW CASH ADVANCES WORK | PROS & CONS OF PAYDAY CASH ADVANCES


Hello and welcome to Solution Loans. This
short video is a guide to payday loans. Payday loans are short-term, low value loans that
have grown in popularity because they give people a way to access funds quickly. They
can be useful in situations where a borrower needs money quickly to avoid bouncing a cheque,
missing a payment or when they don’t want to take out other forms of finance that will
tie them into a longer repayment schedule involving a much larger sum of money. While
the headline APRs are high, payday loans actually compare favourably to some other forms of
consumer finance for those who repay the amount borrowed within a month. The APR is not the
actual interest that will be repaid on the loan. So how do payday loans work? Put simply,
a payday loan is a financial product that is meant to be taken out for a very short
period of time. They are arranged over weeks rather than for many months or years that
other forms of unsecured finance may require. They were originally offered as an emergency
bridge between a borrower’s monthly wage packet and their actual expenses but have
recently grown in scope. Many lenders now offer loans for just one week while, at the
other end of the scale, there are payday loans that offer repayment schedules that stretch
typically up to five months (these can be called instalment loans). The loan is paid
directly into a bank account and, on the repayment date, the lender will charge the amount borrowed
plus interest to the borrower’s debit card or bank account. So why would someone take
out a payday loan? If you need money quickly to meet an unexpected payment or emergency
and you are very confident that you will be able to repay the loan plus the interest on
the date agreed with the lender, then a payday loan, contrary to some coverage, compares
favourably with other short-term finance. For instance, if you borrow £300 for 30
days and repay £400 a month later, the APR you have actually been charged is 400%. This
compares well with an unauthorised overdraft at the bank where there is no legal requirement
to show an APR. If you go £300 over your limit for 30 days, making multiple payments
during that period, you could end up paying charges of anywhere from £150 to £500
(representing actual APRs of up to 900%). The complexity and lack of transparency over
overdraft charges actually makes a payday loan more sensible if you are clear that you’ll
repay the full amount plus interest on the earliest possible date. Rules brought in by
the Financial Conduct Authority (FCA) mean that payday lenders are not allowed to charge
interest and fees equivalent to more than 0.8% per day of the borrowed amount. Furthermore,
lenders cannot charge more than 100% of the total amount borrowed and charges for late
payments must not exceed more than £15. This applies to all so-called “high cost”
loans of up to 12 months (so this also includes some instalment loans). What are the downsides?
If you aren’t certain that you would be able to repay the full amount you want to
borrow on the date agreed then you should seriously consider seeking another way to
cover your expenses. Or alternatively look to cut your expenses instead. Despite the
rules brought in by the FCA, if a borrower fails to keep up with the repayment schedule
agreed with the lender, charges can still rack up and they may still end up having to
repay the loan plus the same amount again in interest charges. You should consider carefully
whether you will be able to afford to repay the loan in full. What you don’t want to
do is end up taking out another loan to repay earlier loans as this can drive you into a
cycle of growing debt. Taking out a payday loan may also affect your ability to get other
forms of credit, particularly mortgages. Many of the larger mortgage lenders won’t consider
lending to an applicant who has applied for a payday loan in the last six months. Other
lenders consider that somebody who has used payday loans in the past – particularly
if they have taken out more than one – represent a poor credit risk because this form of finance
can be seen as a sign of financial distress. So in conclusion for short-term expenditure
or temporary emergencies a payday loan could be an answer if you are confident that you
will be able to repay off the full amount on the day agreed. The FCA rules limiting interest rates and charges mean that some of the more lurid stories
about borrowers having to repay hundreds of pounds more than they expected are now a thing
of the past.

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