While payday loans have long been popular in the USA, they are a comparatively recent arrival for UK borrowers, and many people aren't sure precisely what they involve. With all the argument over whether or not they're a legitimate service or just a form of legitimised scamming, it's a good idea for any GB resident entertaining applying to know exactly what they're getting into.

Plenty of us are short of income nearing the end of the calendar month to one extent or another, and have to tighten our belts a little by trimming down on socializing or other sorts of non-essential spending. This is a perfectly natural (if trying!) fact of financial life for most of us who are employed and are paid each month. Sometimes nevertheless, running out of cash can be more serious than this if there are important expenses to be paid such as an unexpected bill or repair cost.

Some people use the overdraft facility of their bank accounts to allow a bit of an allowance when money is tight, but nowadays many people are permanently overdrawn and close to their limits, so this may not be an option.

A contrasting fashion of keeping you going until your next salary is to use a credit card, both for shopping and cash withdrawals. There are several problems with this, including the fact that credit cards are a less than inexpensive kind of finance, and there's the temptation to to build up a large balance which can have a fateful effect on your long term financial health.

If neither of the last two alternatives are right for you, then a payday loan may well be worth considering. Briefly, these loans are available to virtually everyone with banking facilities and a debit card, and who has a job. When you take one out, the lender will transfer the amount you ask for straight into your bank, usually inside 24 hours of your application being approved. On your application you will have supplied your debit card particulars, and the loan issuer will use these to automatically pay off your loan on your next payday, as well as their charges.

And in that lies one of the key problems with pay day loans - the fees.

This kind of finance is notorious for being costly, and punitive APRs of 1000% or even much higher are perfectly normal. These APR figures are possibly a little misguiding, as the APR system is intended for credit with a longer repayment term than pay day loans where the term is measured in days rather than years. Even so, payday loans are pretty pricy, with a fee of a quarter of the amount you borrow in general the going rate.

The second serious drawback is that repaying your loan and fee is likely to result in you being moneyless once more at the end of next month, and it's all too easy to get into an expensive vicious circle of taking out a loan every month - which is when those high interest rates will really sting.

So, is there any point to a pay day loan? Yes indeed, but only really for an honest crisis where there is no other choice. If you're relying on these loans to pay for your day to day life, then it would be better to study your finances and consider where you can save money, or to reconstitute your debt using a consolidation scheme or similar to free up some supplemental funds every month.

Martin writes for a fast payday loans provider in the UK, and you can read more about the pros and cons of wage advances at his site as well as applying online.

This entry was posted on Monday, September 7th, 2009 at 8:12 am and is filed under Loans. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.