What should you think about before taking out a payday loan?

If you are looking for some fast cash to help you out of a difficult financial situation, whether it is to avoid late repayment charges on a loan, to prevent you defaulting on your mortgage or to cover an unexpected expense, turning to a payday lender could seem like a good option.

But there are a number of things that you need to consider before deciding that this is the right course of action for you.

Payday loans certainly have their advantages in particular situations, but they are not suitable for everyone.

So, what do you need to consider before you take out this kind of finance?

As with any financial product, it really does pay to do your research. Interest on payday loans is generally high compared to other ways of borrowing, but this is largely to reflect the risk that the lender is taking, as well as the fact that it is a short-term loan.

In general, you can expect to pay 25 per cent on the amount you borrow. So, for example, if you take out a loan for £300, you are likely to pay £375 back when you add the interest to the amount you have borrowed.

Bearing this in mind, you should look at a range of providers and see what rates they offer, as well as looking at any additional charges you may be liable for, such as in the event of late repayment.

It is also worth taking the time to check each lender's credentials and, if possible, choose a firm that is affiliated with a financial services provider that you are familiar with.

This will reduce the likelihood of you encountering problems with the lender further down the line or being exposed to intimidating tactics to recover the money that you have borrowed.

You also need to look at your own financial situation when you are looking at payday loans.

Knowing that you are able to pay back the amount you need to borrow, in full, when your pay cheque has cleared is vital. Interest and other fees can mount up quickly on this kind of short-term loan and you could discover that you are out of your depth and struggling with money.

If you think that you may have difficulty in repaying the value of your loan, you may want to consider other options.

Credit cards, authorised overdrafts and unsecured loans are just some of the options open to you if you have a good credit rating.

These can allow more flexibility - and time - when it comes to repayments, so you should look into other financial products that could suit your needs - even if they take longer to arrange.

Of course, the speed with which you can get a payday loan is another reason that they are attractive to many people, coupled with the fact that you will not be required to undergo a credit check.

Generally, the amount you request will be transferred to your bank on the same day, which can be incredibly useful if you have a bill that needs paying immediately.

In terms of the information you will be required to provide, you usually have to give basic personal details, such as your name, address and date of birth, as well as information relating to your work and payroll.

So, if you have had financial difficulties in the past and other routes to finance are closed to you, this could provide the ideal solution for short-term money problems.

Of course, such an option will not work if your financial difficulties run deeper. The high interest charged on payday loans, as well as the fees that accumulate quickly in the event of late repayment, means that they cannot be used as a viable solution to serious debt.

They are useful as a one-off loan, but if you are experiencing bigger problems and find that you are constantly struggling to meet your outgoings, you should make an appointment to see a financial adviser or go to your bank to try and find a more permanent solution to your debt issues.

The key thing to remember is to do your research to make sure you get a loan that meets your requirements and to stay on top of repayments to ensure it does not cost you more than you have budgeted for.

Pay day loans
 

Moneyextra.com recommends you take independent financial advice before acting on any article

Back

2011-05-05 10:57:48 © Moneyextra.com