Payday Loans - An Introduction

A payday loan is a small short-term loan intended to help the borrower meet expenses until their next pay day. Sometimes called a cash advance. The idea first started in America. You will now see these Payday shops advertising 'Cheques cashed' in many High Streets in the UK.

The maximum period is usually 31 days. It is basically there to help the borrower get to their next payday. Repayment is due in full on the borrowers next payday. The borrower will give a post dated cheque to the lender for the full amount plus the interest. Interest on a short term payday loan is high, usually between 20% and 35%. If this figure is expressed as an annual percentage (APR) you will see just how high it is. It can get up to and beyond 1000%!

For example if the borrower has a payday loan of £100 at 25% they will have to repay £125 on the repayment day. A post dated cheque for this amount would have to left with the lender.

Lenders will require some proof about the borrowers income. This will usually be recent payslips to show that they have a regular income, and sometimes bank statements. A poor credit rating is not usually an obstacle to this kind of loan.

The borrower should return to the lender on payday and pay the full amount. If they do not then the lender will process the cheque given by the borrower.

If there are insufficient funds in the account to cover the loan then additional fees and interest will be incurred. The lender must also have an extended payment plan to offer to the borrower. But this could quickly escalate and make the borrowers financial situation a lot worse.

This type of loan will have no effect on the borrowers credit rating.

An alternative and better form of short term loan are the local Credit Unions. There are now many of these throughout the UK and offer lower rates than the payday shops.

Learn more about payday loans, and how to get out of debt in Get Debt Free

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