Do you have questions about payday loans? We have the answers. Below we address the most common payday loan FAQs, giving you the information you need to make an informed decision about your next financial step.
What are payday loans?
A payday loan is typically a small, short-term loan. Called “payday loans” because they were originally amounts lent over the course of a month and repaid on the borrower’s “pay day”, today the term payday loan is used to refer to any short term loan, typically ranging from £50 to £1,000. Repayment periods range from one day and can run for several months. Payday loans are usually used to cover emergency expenses.
Because of their short length, low value and higher risk to lenders, payday loans have a comparatively high APR (Annual Percentage Rate) compared to longer term loans and financial products like credit cards.
Accessibility and speed are the key benefits of these short term financial products. Designed for borrowers with emergency, short-term financial needs, payday loans can often be approved and paid into an account on the day of application, offering an easy-to-use option for consumers in urgent need of finance who don’t have time to go through banks or more traditional lending options.
How do payday loans work?
Payday loans work much like any other loan. The borrower applies for a loan, selecting the amount they want to borrow and the length they want to borrow it for. Unlike more traditional loans, the amount borrowed and the length of the loan are comparatively small. Interest is charged and additional fees will generally not apply if the loan is paid back on time. Some lenders levy fees for late payment, but the Financial Conduct Authority has introduced a price cap meaning borrowers will never pay back more than twice what they borrowed.
Once the borrower’s application has been made, responsible lenders will then perform a credit check and an affordability check, some may also want to see proof of employment. If the borrower is judged to be able to reasonably afford repayment of the loan, the loan will be approved. Borrowers can receive approval and see the requested funds in their accounts within 24 hours in many cases.
Once the loan has been agreed and delivered, the repayment period begins. Borrowers must meet the repayment terms they have agreed to. For some this will be paying the complete sum, including interest and charges, at the end of the week, for others this will mean paying a chunk of the repayment each month for over the agreed period. The terms will depend on the size and length of the loan. If repayment terms are not met, late penalties and extra interest may need to be paid. Once the loan has been repaid in full, the loan is complete.
What is bad credit?
Virtually every adult in the UK has a credit report. This is a log which details your use of credit, including information on everything from unpaid phone bills, to credit card usage, bankruptcy, use of debt management, who you share accounts with – and much more.
Lenders use this report to gauge whether or not you are a responsible user of financial products and to decide whether you are likely (or able) to make repayments on a loan. If you have bad credit, you may find it difficult to access financial products like payday loans.
Bad credit can take many forms; missed or late payments stay on your credit report for six years, as do county court judgements for non-payment and bankruptcy. People you are linked to financially (known as financial associates) can also harm your credit rating. If your spouse has bad credit and you have a joint mortgage, their credit report will be available to view and could harm your access to credit.
Failing to repay a payday loan on time (or at all) will harm your credit rating, making it more difficult to access any type of credit in the future.
Who can apply for a payday loan?
Any adult over the age of 18, living in the UK, with a bank account can apply for a payday loan in this country. However, not every applicant will be accepted. Any good lender will perform a credit check and an affordability check to make sure you can afford to take on the loan you are requesting. If you have bad credit, or the requested loan is judged to be beyond your financial reach, you will not be accepted.
Not every payday lender has such strict criteria, however. If you are using a lender who does not check your credit or run an affordability test, you are most likely not dealing with a responsible of scrupulous lender and should take care. Proceeding with your loan may result in serious financial difficulty if you are not able to meet repayments.
What are the types of payday loan?
There are a few different varieties of payday loans available to short term borrowers, the most common are:
The “classic” payday loan
The best known version of the payday loan – borrowers take out a loan of between £50 and £500, repaying the whole amount plus interest at the end of their chosen loan period (from one to 35 days).
The instalment payday loan
Typically longer than a “classic” payday loan (typically from three to 12 months), an instalment loan allows you to repay a small loan amount (ranging widely from £50-£10,000), plus interest and over a series of staggered payments, broken down into chunks designed to make repayment more manageable.
How do lenders approve payday loans?
If you are dealing with a responsible lender, your loan approval will be subject to a credit check and an affordability check. Some lenders, like Wizzcash.com, will also ask for proof of employment and earnings of at least £750 per month before approving a payday loan. Lenders who undertake these responsible practices will look at your credit report and ask for employment and bank details to verify your earnings, employment and accounts.
What is APR?
APR is a percentage calculated by adding up how much interest borrowers will pay and how much additional fees and extras will cost overall. This figure is then averaged out over a year to provide a figure which allows consumers to compare the cost of borrowing between different lenders. You can learn more about APR here.
Do you have more questions about payday loans? The Wizzcash.co.uk website is full of information created to help you make a more informed decision about your finances. Find out more & apply for a loan here.