Summary: this article explains the costs that may be associated with payday loans.
A payday loan is a short term loan that is provided by 'loan shops' either on the high street or online. They tend to be for lower amounts and are unsecured. They appeal to many individuals as they will often pay out to those with a low credit rating, the finances can be in an account within minutes and the extra cash injection can help tide some people over until payday (thus the name).
What is the cost of a payday loan?
There will not usually be any fee to take out the loan, as the loan shop will make their money from the interest charged. This will usually be calculated at the time the loan is taken out and will be added to the total amount owed. Provided the loan is repaid by the agreed date, this amount will be the only cost associated with the loan. A typical charge is in the region of £25 per £100 borrowed per month, so if an individual took a loan for £500 over a month, the total charge would be £125, resulting in a total repayment of £625.
Are there any catches to a payday loan?
There is a lot of publicity surrounding payday loans at the moment, often relating to the way the loans are 'sold' and the extremely high rates of interest. For some, they can be a very convenient way to access additional cash if required, provided they can afford to repay the loan by the due date. However, due to the easy access of such loans, and the willingness of companies to lend to those with poor credit records, they tend to appeal to those that may be in financial difficulty who often end up struggling to make the full repayment on time. As there is currently no legal limits to how long the loan can roll over for, some individuals are seeing their interest repayment alone far outstrip the original cost of the loan. For example, assuming a monthly charge of £25 per £100, the total amount to repay on a 1 month loan for £500 would be £625 (the original £500 plus £125 charges). If there was a problem repaying the loan and it rolled on for 6 months, the total to repay would be £1250 (the original £500 plus £750 charges). It is also important to read all the small print in the agreement to see if the lender is likely to levy any additional charges such as for late payment.