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So What’s the Deal With Payday Loans?

Since 2006, the amount of Payday Loans authorised has increased fourfold in Britain; despite the wide spread stigma and wariness that is whispered against them. Their detractors consider them risky and a trick, while their backers see them as fulfilling a gap in the market for those who fail to establish better lines of credit. Whichever camp you belong to, you cannot deny they split people down the middle and cause hullabaloo whenever they are mentioned.

How do Payday Loans Work? The thinking behind payday loans is they are there to be used for unpredicted crisis’, as money is tight for everyone at the moment many don’t have an urgenency fund and/or can’t get a credit line from the High St Banks. The amount of time the loan will cover is as a rule expected to be days or weeks and at most a month, the maximum amount loaned will be the full amount of the monthly pay, though it’s not unheard of for some of the companies to offer a higher amount. Payday loans can be approved within thirty minutes to an hour, the only criteria being you are in full time job and you have a bank account. The process won’t need a credit check and the only testimony necessary will be a driving license, bank statement, a utility bill with your current address and the last few payslips received. The regular course of action is when the loan is accepted, you give them a post dated cheque which they will cash on your payday, if you are in a severe state of affairs it is possible to roll over the loan to the next month. This is not counselled though for reasons you will soon read.

The Benefits of Payday Loans:The widespread view is that, if used smartly and for one off situations while also budgeted correctly, they can be an effective tool and bridge to the next payday. To show how hated payday loans are in the media, the argument in their favour is actually more of a defence against the heaviest criticisms, which is inevitably centred on the APR rate of payday loans. Wonga.com is in general considered to have one of the lowest APR rates at 2,689% (at the time of writing) as well as being classed as the most “ethical” of the payday loan companies. Such a large APR will obviously push people away, yet when you look under the bonnet, it is not as petrifying as it seems, to start with, APR stands for “Annual Percentage Rate” the key word being annual here. It’s hard to pinpoint the exact average of the interest amount as it’s merged under APR when the loan is in reality only going to be for a few days or weeks, but it’s around a third of the amount lent, for example purposes we’re going to use 30% as the mock up interest rate. So for every £100 borrowed, add an further £30 as interest, can you guess at what APR this will be? 2000% APR, doesn’t sound right does it? Let’s measure it to an unsecured £5000 loan spread over 7 years, if the Interest is also 30% of the loan the amount to be paid back will be £6,650, that would total to £98 a month repayments…at 12.4% APR. So when compared to a more conformist unsecured loan, an APR that stretches to thousands in percentage points means very little when it comes down to details. If that wasn’t enough, on 16th October 2010 on BBC Radio’s 4 Moneytalk program, an OFT spokesmen said, in all but name, that Payday Loans are a necessary evil, if they were to be more deeply regulated, or even forbidden, they would force people into the “Unregulated Market”, aka loan sharks. slick cash loan

The Drawbacks of Payday Loans: What critics will point out is that the payday loan market is borderline, if not blatant legal loan sharking to begin with, they can put the vulnerable into a vicious series of debt, if you are short this month, you’re going to be even shorter next month, forcing you to revisit the loan company and ask for a larger loan. The other alternative can be just as grim, it is easy to request the loan to be pushed back for another month and if that happens; with every month rolled over the APR is recalculated and it can double the loan each month if it’s not paid. That 2000% APR looks a lot more of a peril and real under these conditions. It has not been unheard of for people to take out payday loans to increase their own credit rating by taking out a loan every month for a few months, where this plan falls down is payday loans are not reported to the credit rating agencies, it will not help boost your rating whatsoever. If you hunt down other avenues to bring your monthly expenditure down, you should not need to go for a payday loan, try phoning the companies up you are supposed to pay and work out a payment plan, even if they are a credit card company, utility company etc. All companies will have a section that works on monthly repayments, they just do their best not to broadcast it as it’s not really in their interests (especially true of credit card companies), but they have to be ready for worst case scenarios. Finally, if you are not making much headway with setting up a repayment schedule seek help and guidance from a non profit credit counselling service, they can give you helpful hints on how best to deal and bargain with your creditors. In the long run it will save you a large sum which would otherwise have go on paying the payday loan interest which could be put to better use.

 

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