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How Do Payday Loans Work

How Do Payday Loans Work?

A payday loan is a method of borrowing small amounts of money for a short period of time. Loans can vary in size and term, but they are typically between £100 and £100, and repaid over 30 days. The idea behind these loans is to tide people over to the next payday (hence the name) and cover unexpected expenses, such as car repairs.

How do payday loans work online?

There are a number of payday loan companies around these days, with online lending growing faster than any other product on the financial market. The growth in popularity is thought to be down to the squeeze on incomes and the difficulty obtaining more traditional forms of credit.

Consumers can apply for payday loans online, complete the forms and often have the money in their bank account on the same day, some even send the funds within an hour. The amount of time you have to repay the loan with depend on your selected repayment date or your next payday – it differs between lenders.

The full loan plus interest and fees will be taken directly from your bank account. If you fail to repay the request amount, the creditor will likely make multiple attempts, possibily incurring further charges. By contacting the provider, you might be able to roll over the loan to the next month, giving you more time to repay what you owe. You can also search for “how do payday loans work yahoo answers” to get other peoples advice.

Who are they for?

The waypayday loans work means that people with low incomes and poor credit scores are able to get access to the credit they need. It's important that people use this method of borrowing properly; it's not designed supplement income, but just provide a boost every now and again.

Short term borrowing can also be helpful in situations when you need to get your hands on money fast. It might be because of an unexpected bill, such as emergency car repairs, or because you've run out of cash the day before your payday. It's quick cash method, means that a payday loan can often be more appropriate than waiting for a credit application to go through or going into an unauthorised overdraft.

As long as you are confident that you can repay the loan on time, you shouldn't face any problems with payday loans. It's important to remember that borrowed money isn't your money, so don't apply for anything you can't afford.

How much do they cost?

There has been a lot of media hype about how payday loans work and that they are causing debt problems for vulnerable people. Whilst there may be a small percentage of customers dissatisfied with their experience, payday loans have more benefits than drawbacks.

The cost of a payday loan is higher than more traditional methods of borrowing, but that's because you're accessing money without the rigmarole of a credit check and you can get the funds quickly.

Interest rates and APR has been used to make out that payday loans are charging people thousands of pounds a year. However, because they're designed to be short-term, it's rather disproportionate.

Imagine that you asked me for £20 for two weeks and I agreed, but would charge you 500% APR. You'd probably tell me I could keep my £20 and you'd find it elsewhere. But what about if I said ok, but you owe me a couple of pints (£6) on your payday? That seems fairly reasonable and it's probably the sort of agreement in place between family and friends all around the world.

However, when you break it down into facts and figures, you are being charged at a rate of approximately 782% APR! Why? Because you are not borrowing the £20 over a year, just for a couple of weeks.

Remember that the way payday loans work is a very similar idea. Although the headline interest rate might advertise 5000% APR, the cost of borrowing per £100 over 30 days is a much better way to compare how much the loan will cost you.

Advantages & disadvantages

As with all types of borrowing, whether it be credit cards, mortgages, overdrafts or bank loans, there are pros and cons. We'll start off with the advantages:

The way that payday loans work means that the funds can often be in your bank account on the same day and sometimes within minutes of finalising the paperwork.

Privacy: as you're applying online, you don't need to explain why you want the money or what you're going to spend it on. You'll also have complete anonymity.

No collateral: short term and instant cash loans do not require any security, so you won't have to secure the loan against any of your assets, such as a car or house.

Convenient: unlike traditional bank loans, you can apply for payday loans and get the money, 24 hours a day. If you're stuck over a weekend or even in the middle of the night, you can still get your cash in a flash.

There are a couple of disadvantages to payday loans, but you'll have to weigh up the pros and cons and decide whether they're right for you. Think about the costs involved and remember that they are not designed to help solve financial woes.

How to compare payday loans?

When you're looking into how payday loans work and considering applying for one, it's a good idea to shop around to ensure that you're getting the best deal. As has been mentioned, it's often better to look at the cost of borrowing per £100 over 30 days rather than the APR. As there are so many online payday lenders around, it may be worth paying a little bit more for the privilege of borrowing from a well-known creditor.

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APR Explained

Rates between 45.3% ARR to maximum 1575% APR

Representative 277.6% APR

Representative Example:

Amount of credit: £850 for 11 months at £146.30 per month.

Total repayment of £1,609.25. Interest: £759.25.

Interest rate: 150% pa (fixed). 277.6% APR Representative.

APR rates range from 45.3% APR to 1575% Max APR. Your APR rate will be based on your circumstances.

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