payday loan

For anybody who wants a short cash injection to see them through a financial difficulty, then a payday loan is an attractive option. As long as you understand the penalties for not paying the cash back on time and the high cost of borrowing, it may be a solution that – although not perfect – will do the job.

What is a payday loan?

A payday loan is a short-term borrowing option lots of people use to help them reach their next salary cheque. They are convenient, quick to take out and often will be favourable even towards people with bad credit history.

What do you pay back in interest?

For this sort of loan, the lender will typically charge a fee rather than interest. An example would be that a £100 monthly loan would attract a fee of £25. This means that you borrow £100 and pay back £125. If you put this up against the interest charged on a bog-standard credit card at an APR (Annual Percentage Rate) of 20 per cent, then it would cost £20 to borrow £100 for 12 months. This is £5 less than a payday loan but is not ‘like for like’.

To use APR for a payday loan would be a meaningless exercise as they are so short. The borrower is paying for the convenience. It’s a bit like buying frozen lasagne, rather than putting the ingredients together yourself.

Legislation

The FCA (Financial Conduct Authority) have put into place rules that will govern the cost of borrowing for people taking out payday loans. The new legislation strikes a balance between helping the consumer get over their financial shortfalls for the month, and enabling lenders to make a reasonable profit. This should help take out the ‘bad’ payday loan lenders from the sector, by making sure that a borrower never gets into a contract and has to pay back double. The FCA hopes that this will also put an end to ‘spiralling payday debts’.

The result is that if a borrower pays back the loan within the time stipulated in the contract, there is now substantial legal protection. This will include, a cap per day of 0.8%, £15 fixed default fees, and 100% total cost capping.

The Changes

From January 2015, if you borrow, you will never pay back double the amount. If you take out a payday loan for 30 days and pay back on time, you will not be charged more than £24 in costs and fees. You may find it useful to compare payday loans online to find the best deal.

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