Why is the APR so high

Every lender must disclose their representative APR. APR is really helpful when used to compare loans that are for a year or longer. APR is not the best way to compare payday loans because you are usually paying the loan back within 31 days or so.

The APR number becomes extremely high because it represents the interest that would be payable if you did actually have that payday loan, at that rate, for a year.

APR is not easy to understand and that's why before applying you need to make sure you know exactly what you are going to pay back on your payday. Most payday loans have a certain charge for every £100 borrowed but others still calculate the repayments using APR.

How do they work

A payday loan is a small, short term cash loan solution that can provide you with finance to tide you over until you are next paid from your employer.

You will need to do an application via their website or over the phone. They will credit check you (some companies do “no credit check loans”) and check the validity of your employment and bank details. If you are accepted, the money is generally paid out within a couple of days of your application (although some lenders do instant or 24 hour loans). You have the money for the length of the term, unless you wish to pay it back early at not extra charge.

When it comes around to your next payday, the money is usually deducted from your debit card. If you need to, you may be able to roll the loan over to your next payday but remember that this can end up costing you a lot more as interest charges still apply again and you may be charged for rolling over the loan.

Extra charges a payday lender may charge

Administration fee – this is a charge you must pay if accepted for a loan

Validity fee – this is usually applied if they need to check that the debit card details you provided with them are valid

Transfer fee – this is generally an optional charge that is included if you wish to receive your loan in your bank quicker than the usual transfer time

Roll-over costs – this is generally a high fee incurred if you wish to roll-over your loan until next month

Late payment fees – if you do not make your payment on time they may add an extra charge onto your loan

Phone calls or letters requesting repayments – if you miss repayments or default on your loan they are able to charge you for phone calls or letters to chase the money

Default fee – this is applicable is you default on your loan and this charge is usually the highest

Early settlement fee – this is applicable if you pay your loan off early, most payday lenders do not charge any extra fees, you will just have to pay the interest agreed on the initial agreement

Arrears fee – this is applicable is you fall into arrears with your loan

Collections fee – this is applicable if you do not repay your loan and the payday company have to involve a collections company to recoup the debt from you

Cancelling your debit card – if the company finds out you have cancelled your debit card to try and stop them taking payment, they can charge you extra for this

Solicitor fees – applicable if the payday company have to assign a solicitor to your case if it is going to court.

Advantages of a payday loan

• Quick access to cash advances for salaried employees
• Equal opportunity loan so you can apply for most if you have a poor credit history
• If you pay them back according to the loan agreement then they can help you rebuild your credit history
• The application process if very simple
• It's easy to borrow the money
• Eligibility criteria is minimal
• Small amount for short term so you are not in debt for very much and not for long

Disadvantages of a payday loan

• Really high interest rates
• High extra charges could be applied
• The charge per £100 borrowed can sometimes be up to £50
• Not paying them back can really ruin your credit history and completely destroy it
• Not repaying a payday loan can leave you broke, stressed out and unhappy
• They can worsen your debt as they increase your monthly outgoings
• If you have a good credit history they are a really expensive loan and shouldn't be treated as your first option to obtain credit

Alternatives to payday loans

• Build up an emergency fund in your savings account
• Keep an secret credit card hidden for emergency expenses
• Get a loan from a credit union
• Get a part time job for extra cash
• Negotiate a payment plan with your current lenders
• Try a peer to peer lender for a better deal
• Talk to your creditor about extending your due date
• Do some overtime in your current job
• Ask your employer for an advance on your wages
• Sell or pawn things you no longer need
• Look for local emergency hardship programs
• Borrow from a friend or a family member

See all Payday Loans