Payday loans are one of the most popular means of finding cash fast, but also one of the biggest mysteries for customers all over. If you’re wondering how this type of loan works, you’re in the right place. We’ll use this opportunity to tell you everything you need to know about payday loans, how they work, what to look for, and more.
By the time you’re done reading this guide, you should have enough information to make an educated decision whether to take one of these or look for another type of financing.
What are Payday Loans
Payday loans are means to an end. They are a form of emergency financing that is meant to bridge a gap between pay checks. Whenever you take a loan, you’re actually purchasing a financial instrument. In other words, you’ll always pay a price for the money you’ve ‘bought’.
Different loans come with different interest rates, some being higher than others. Payday loans have high-interest rates purely because of their nature.
Why are Payday Loan Interest Rates so High?
Most loans, such as ones you can get in a bank or other financial institutions, are long term loans that have a reasonable interest rate. However, the fact that payday loans are short term loans, often spanning a week or two at best, forces the lender to increase the interest rate. If you see annual percentage interest rates reaching 1,500%, that’s completely normal.
Having a high-interest rate is the only way the lender can make money in such a short timeframe. Knowing and completely understanding this concept is key.
Are Payday Loans Predatory?
The main problem with payday loans is misusing them. The experts over at luckyloans.co.uk/ state that payday loans are often used instead of more appropriate financial instruments due to how easy they are to take out. Such misuse of payday loans leads to all kinds of trouble, which is why this type of loan has been painted as predatory by many. In reality, a payday loan is a great tool for those who understand their finances and know how to manage their funds.
Is the Application Process Difficult?
Applying for a payday loan is a fairly simple process, depending on the lender. Most will allow you to apply online by filling out a simple application form. In the majority of cases, your online application will be cleared within 24 hours. Most lenders will also offer loans to individuals with bad credit or no credit at all, which is why so many people are utilizing payday loans these days.
Naturally, whether you’ll get the loan or not also depends on the amount you’re taking. Going past a certain figure might put you in the personal loan territory, which follows a completely different set of rules and application guidelines.
How to Be Smart with Payday Loans?
As we’ve mentioned before, payday loans are a tool. Every tool has a purpose and understanding the scope of that purpose will help you avoid any potentially uncomfortable situations.
The basic rules are quite simple:
- Only take out what you can pay off
- Make sure to read, understand, and fully internalize the conditions of the loan
- Never take a payday loan to pay for unnecessary things
- Make sure that you can cover the payments on time
Are Payday Loans Safe?
Contrary to popular belief, payday loans are regulated in the United Kingdom. All lenders need to be cleared by the Financial Conduct Authority prior to being eligible to offer any loans. The FCA constantly monitors the situation on the ground and is heavily involved in sanctioning those who break the rules.
However, the fact that this entire industry operates under the watchful eye of the FCA doesn’t mean that you are protected if you break the terms of the loan.
Always Look for Optimal Form of Financing
Shopping for financing is a great way to build credit and to achieve your goals. Money is cheap these days, so it absolutely pays off to shop around for the best deal you can find. If you’re in need of money, it’s highly recommended that you find the optimal type of financing for your current needs.
If that means taking out a payday loan, don’t be afraid of taking such a commitment. Money in hand tonight beats any low APR you can find on a loan that you can’t cash in for at least a month. Be smart with your finances and you’ll end up on top, no matter which path you take.