What are Payday loans?
A payday loan is a one-off, short term loan designed to keep your finances afloat until you receive your monthly wages. You generally have the option borrow between £80 and £1,000 and the idea is that you pay off the loan in full as soon as your monthly wages arrive in your bank.
However this instant-access borrowing doesn't come cheap, and most payday loans UK companies charge rates of interest into the thousands.
Although payday loan lenders design their packages to be short-term, instant loans there is an option to roll on your debt from month to month - a very bad idea considering the amount of interest you will be paying.
Who should consider getting one?
Payday loans shouldn't ever be your first option. However, despite the fact that the 'Credit Crunch' may now be officially over, it has left many people still desperate for cash. If you have exhausted every other possible avenue of raising finance, have a few too many black marks on your credit history and have a genuine unavoidable reason for needing the money, then - and only then - should you consider the possibility of taking out a payday loan.
There are exceptional circumstances that might push you towards taking out a pay day loan, such as an unexpected bill. However always try talking to whoever sent you the bill first. If you explain your situation then it may be possible to come to some arrangement with regards to making staggered payments - don't think that a 'bad credit loan' is your only option. Investigating other possible avenues of finance first is a must.
How do you get one?
Payday lenders advertise their products as instant loans pushing the fact that taking out one of their same day loans is quick and easy - which, of course, is part of their attraction - rather than properly explaining the cost. They are more lenient with borrowing history meaning bad credit won't necessarily affect your application although should carry out affordability and credit checks. You can apply for payday loans online and have the money transferred to your bank account in as little as 15 minutes. As long as you are over 18, have a bank account and are employed with a regular month income, then you should be able to apply for a payday loan from a wide selection of new payday loan lenders which gives you the power to compare your options and go for the cheapest if you really need to go down this route.
Even though the interest rates on pay day loans are astronomical, you should still shop around and try to get the lowest possible APR you can find. To give you an idea, a quick look at our payday loan comparison table shows rates of interest varying by 1,000s%. Plumping for the lower APR could mean a significant saving on the amount of interest you pay back. Comparing the cost for the amount you want to borrow over the period you want to borrow is essential because this is the only way you'll know what your borrowing will cost you.
Some payday loan companies hide their APR rates by quoting your repayments in pounds only. Paying back £125 when you borrow £100 might sound attractive if you are in a tight situation, but lurking behind that £25 charge is an APR of 1737%. You need to pay careful attention to the APR rate. If you fail to pay back your loan with your month's wages, you will find yourself being charged extra interest for each subsequent month.
Most importantly, just because applying for short term loans is so quick and easy, it doesn't mean that you have to rush into it when it comes to taking one out. Take your time and read all of the small print in the terms & conditions extremely carefully. Compare payday loan companies, and compare their criteria - and most importantly compare APRs and the cost of borrowing. You should also check that they are signed up to the Good Practice Charter because this should mean that they'll employ more measures to give you a fairer service.
How to make it work for you?
If you are willing to take out a payday loan despite the astronomical interest rates, then the only way you can extricate yourself from an extremely perilous financial situation is to ensure that you pay back the entire amount that you borrowed as soon as you are paid your wages.
It is vital that you only ever borrow what you can actually repay from your next pay packet and clear the debt as soon as possible. To do this, only ever borrow the absolute minimum amount you need. If you need to borrow £200, then think very hard about whether you can manage with £100.
Never in any circumstances be tempted to borrow a little bit more because it is being waved in front of your nose by payday loan lenders. This will only make an already dangerous situation much worse. If you are forced to carry over or defer your loan to the following month then your debt will grow - quickly. You could also incur bank charges if your loan repayments take you beyond your authorised overdraft limit.
Look for a new payday loan lender
If you've had a loan previously, don't be tempted to stick with the same payday lender you've borrowed from before just because you know they've accepted you (even if you're worried about credit checks) because new payday loan companies may offer a less expensive option.
It's vital to shop around because payday loans aren't a cheap way to borrow (payday loan APRs are in the thousands). Borrowing from a new payday loan company could cut what you need to pay back dramatically.
If you can't avoid taking out a payday loan then make sure you compare new payday lenders alongside the more established names and go with the option that means you pay as little as possible in fees and charges. Then repay your borrowing as quickly as possible to keep the cost down.
What alternatives are there?
If you are even considering pay day loans then it is probably a good indicator that you are already living beyond your means. If that is the case, you should think about contacting your nearest Citizens Advice Bureau or a debt charity like StepChange, not brokers or payday loan lenders, to discuss how you can go about reducing your debts. There are also a number of debt repayment charities throughout the country that were set up to provide support and help to people in these exact circumstances.
Ask yourself if you really do need a payday loan. Then go to bed and when you wake up in the morning, ask yourself again: do you need this loan? There's a world of difference from taking a loan out to buy food for your children, and paying up front for a holiday.
If the answer is still 'yes', consider asking a parent, partner or friend to loan you the money. The old adage about not mixing money and friends might have some truth to it, but so does 'a friend in need'. Sometimes just discussing the issue with someone close to you may open up a solution that you hadn't previously considered.
If your credit rating will allow it, there are so many better options out there than same day loans. Whereas we don't condone running up debt, many of the major credit cards offer 0% against new purchases for a number of months which could potentially help you bridge the gap between paydays. Even personal loans are available from as little as 9% APR - a slightly more manageable figure than 2,000%!
Other useful resources for payday loan lenders:
Stepchange - Free online, independent, consumer credit advice
Advice & Guidance - Payday loan advice from the Citizen's Advice Bureau
Money Advice Service - Free advice on payday loans
About our payday loans comparison
Who do we include in this comparison?
We include our panel of direct lenders and credit facilities that offer short term loans. They are all regulated by the FCA, satisfy our screening standards and do not pass your details to other lenders or brokers without your permission. Here is more information about how our website works.
How do we make money from our comparison?
We have commercial agreements with some of the companies in this comparison and get paid commission if we help you take out one of their products or services. Find out more here.
You do not pay any extra and the deal you get is not affected.