Payday Loans : For and Against

Payday loans are a relatively new service for UK residents, and with all the controversy surrounding them it\'s a good idea to know what you\'re getting into before you apply. This article sheds some light on the subject.

While payday loans have been popular for a long time in the USA, they are a relatively new service for British customers, and a lot of people aren't certain exactly what they are. With all the controversy over whether or not they're a worthwhile service or only a kind of legally accepted scamming, it's a good idea for any UK borrower entertaining applying to realise exactly what they're getting into.

Plenty of us run out of money when getting towards the close of the calendar month to at least some extent, and have to rein in our spending a little by cutting down on socialisation or other forms of non-essential expenditure. This is a perfectly normal (if irritating!) fact of financial life for most of us who are working and are paid once a month. Sometimes however, running out of funds can be more critical than this if there are crucial expenses to be paid such as an unexpected bill or repair cost.

Some people utilise the overdraft facility of their bank accounts to provide for a bit of leeway when funds are short, but in today's world many people are always overdrawn and approaching their limits, so this may not be an option.

An alternate way of tiding you over until your next pay is to utilise a credit card, both for purchases and cash withdrawals. There are numerous problems with this, not least the fact that credit cards are a costly type of borrowing, and it's tempting to build up a heavy balance which can have a calamitous effect on your long term financial health.

If neither of the last two options sound good for you you, then a payday loan might well be worth looking at. In brief, these loans are available to nearly anyone with banking facilities and a debit card, and who is in regular employment. When you take a payday loan out, the lender will transfer the sum you ask for directly into your bank, normally inside a working day of your application being okayed. On your application you will have given your debit card details, and the loan issuer will use these to automatically pay off your loan on your next pay day, along with their fees.

And therein lies one of the principal problems with cash advance loans - the fees.

This sort of borrowing is ill-famed for being pricey, and punitive APRs of 1000% or even much more are perfectly normal. These interest rate figures are possibly a little misguiding, as the APR system is designed for finance with a longer repayment term than wage advance loans where the term is measured in days rather than years. All the same, these loans are rather dear, with a cost of 25% of the amount you borrow in general the going rate.

The second serious problem is that paying off your loan and fee is likely to lead you into being moneyless once more at the end of next month, and it's easy to get into a punishing downward spiral of taking out a loan each month - which is when those exorbitant APR rates will really start to have an effect.

So, is there any point to a wage day loan? Of course, but only really for an authentic crisis where there is no alternative. If you're using cash advances to pay for your everyday life, then it would be better to analyze your budget and consider where you can save money, or to restructure your debt using a consolidation scheme or similar to set free some extra money every month.

About the author: Martin Sumner writes on finance and credit issues, and is currently contributing to UK Pay Day where you can arrange short term loans until your next wage comes in.