Published On: Tue, Feb 13th, 2018

5 Things You Need to Know about Payday Loans

Payday loans get a lot of bad press. Most people have heard the horror stories of individuals who borrowed a small sum of money and ended up paying the money back a thousand times over thanks to outrageous interest charges. Yes, it is fair to say that payday lenders are about as popular as traffic wardens and estate agents.

photo/ Gerd Altmann

In certain circumstances, however, payday loans can be useful, so here is a quick guide to how payday micro loans work so you can make an informed decision before you borrow the cash from a direct lender.

What are Payday Loans?

Before we discuss what you need to know about payday loans, let’s take a look at what payday loans actually are.

A payday loan is a short-term loan. People typically borrow the cash until their next payday, hence the name, but you can take out a payday loan for up to 18 months. Some lenders ask for a post-dated cheque but many set up a continuous payment agreement so they can take money from your bank or card on demand. Short-term loans are useful if you need cash fast, but they are not the best choice for everyone.

Interest Rates Are High

The main reason why payday loans get such bad press is that the interest rates charged are very high. Payday loan companies typically lend money to high-risk individuals who have no other finance options, so they charge a lot of interest to cover their costs.

No Questions Asked

Payday loan companies don’t run credit checks and rarely ask why you need the money. The application process is minimal and you can expect a near instant decision when you apply.

You Can Cancel the Repayments

Continuous payment authorities (CPAs) allow payday lenders access to your bank account via a debit card. These are very easy to set up, which is why it takes minutes to organise a payday loan. However, it used to be difficult for borrowers to cancel the payment authority, so payments would sometimes continue regardless of the situation, leaving the person even deeper in debt.

This is no longer the case anymore. If your payday loan company has set up a CPA on your card, you have the right to cancel it – simply contact your bank and let them know who the lender is. If any more payments are taken after you put in a cancellation request, the bank must refund you the money.

Bad Credit is No Barrier

It doesn’t matter how bad your credit is, most payday lenders will still accept you as a borrower.

Other Finance Options Might Be More Suitable

Payday loans are useful under some circumstances. They can actually save you money if you are about to go into an unauthorised overdraft and payday is only a few days away. However, it might be an idea to consider your other options before you sign up for a payday loan, as they are expensive.

Don’t take out a payday loan unless you are certain you can pay back the money. If you do fall behind on payments, talk to your lender to see if they will freeze the charges.

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