If you put 'payday loans' into Google, as well as getting lenders you will see news articles and maybe even a blog or website entry that is heavily critical of these types of loans. But if you also look at the websites of many of the payday loan providers themselves then you will see that most of them have statements on how they will act responsibly when considering applications.
A lot of criticism that is levelled at payday loans relates to the very high APR that legally has to be displayed. Some of these APR figures look truly frightening; over 2000% is not uncommon. But the problem with these numbers is that they completely fail to give a true picture of what you would actually pay for borrowing money this way.
Compare a typical £500 pay day loan with the same amount borrowed with a personal unsecured loan. Typical unsecured loan APR rates look much lower than the pay day loan rate, but when you consider that the pay day loan will cost around £125 to borrow - making a total of £625 to be repaid - and the personal loan over a minimum six month term would cost a total of £721* then the comparison doesn't start to look so bad.
Using a credit card to buy something for £500 is obviously going to work out cheaper so long as you can pay it off fairly quickly, but if you need cash in your bank account then the fees associated with using these can work out to be fairly expensive. The great thing about payday loans is that they can help to instill discipline in your finances. Research has shown that most people do not tend to pay off their credit cards bills in full every month even if it is a manageable amount. Debts like these can easily mount up, eventually becoming absorbed into a debt consolidation loan. The effect is that this debt never actually goes away it simply gets moved from one place to another within a person's personal finances.
Because a payday loan is required to be repaid in full on the required date this means that a customer is not getting themselves into further difficulties. The debt is paid off, not mounting up the interest somewhere.
The best payday loan lenders act responsibly when considering a customer's application for funds. First of all they insist that a customer is employed and receiving a regular wage, unlike personal loans or credit card companies who will accept you if you are self employed and perhaps at that moment in time not earning anything. Payday loan lenders will check very carefully a customer's ability to repay the amount being borrowed, which protects both parties.
It is all too easy to run up debts of thousands of pounds with a personal loan or credit card. Many payday loan lenders will start a new customer off with a maximum of £200. Once they have proved that they are able to pay this back then they will be allowed to borrow more, but always based on their ability to repay. This helps to ensure that a customer is not borrowing beyond their means.
Of the other big advantage of a payday loan is their speed. Most lenders will be able to wire the funds into a customer's account within an hour or so, in some cases within minutes. A personal loan applied for online will take at least 24 hours, and any cash drawn out from a cash point using a credit card and paid into an account can take up to three days to show as cleared funds.
Used correctly and responsibly a payday loan can provide a faster, cheaper and more helpful alternative to other types of credit.
*Comparison made on popular loan comparison site on 29/04/10 with cheapest APR loan provider over 6 months at that moment in time.
