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Tuesday, April 5, 2022




UK FINANCE BLOGGER


LOANS AND LENDING TIPS AND ADVICE.

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WHY IS INTEREST ON PAYDAY LOANS SO HIGH?

 * Payday Loans

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Payday loans can seem far too expensive, especially when you look at the AER
which is the advertised rates. These rates may put you off having a payday loan
and you may wonder how they can get away with charging so much. Then when you
learn that they charge even more if a person does not repay then this can make
you feel even more concerned about it all. However, there are good reasons why
they charge as they do and why the AER seems to be such a high figure. It is
worth understanding a bit more about it all before you decide that they are just
not something that you would consider taking out.

What is AER?


AER stands for Annual Equivalent Rate and it differs form just the interest rate
which we will often also see on loans. An interest rate is purely the percentage
of interest that you will be charged on the money that you borrow. However, this
may not be all that you are paying. Many loans will have additional fees,
perhaps admin fees, which all borrowers have to pay as well. In order to make it
easier to compare loans, the AER is sometimes used. This adds in the cost of
everything that a borrower is expected to pay and then puts it into a
percentage. It can be really high and look very odd at times. For some people it
can be far better to just ask the lender exactly what you will be paying in
monetary terms and compare that figure as it is much more real and easy to
visualise compared with a percentage rate.

On a short term loan the AER may be very much higher than on a long term loan.
This is because the admin fee tends to be the same, but when it is spread across
many years of loan repayments, as it would be with a mortgage, then it is very
low, but if you take out a short-term loan such as a payday loan it only lasts
for a few weeks so the figure is very much higher. It is all to do with the way
the maths is worked out and therefore why looking at it in monetary terms may
just make a lot more sense to you.

What is a payday loan?


A payday loan is a short-term loan which usually only lasts a few weeks. It is
usually for up to £1,000 and has to be repaid when the borrowed next gets paid.
The full balance usually has to be repaid all at once. To make this easier, a
direct debit is set up to go out of the borrowers account on their payday and
they will be able to then take all that is owed. There is just one repayment,
which means that the loan is over with very quickly but you do have to find the
money to repay it all at once.

Payday loans were set up to help those who could not borrow elsewhere. This is
why there is no credit check. The loans are also arranged very quickly, this is
to help out those who need money in an emergency. However, due to them arranging
loans at any time, doing it quickly and taking on risky customers, they are
expensive. They need to charge enough to cover their losses should they need to.
However, they are not necessarily the most expensive type of loan.

Advantages of payday loans


So although the AER looks high on a payday loan, they may not be as expensive as
they seem. The cost is relatively high due to the administration charges, but it
is always very clear what you will be expected to repay as you can calculate
this on their website. As there is just one repayment, you will not have lots of
interest to pay month after month and the debt will not linger. You also do not
have to worry about whether you have a good enough credit score as this will not
be looked at. You will also be able to get the money really quickly, which could
be very useful if you need it for an emergency purchase or to pay a bill or
something else with a very close deadline.

So, although the interest is high there are reasons for this. The lender is
taking a risk but it means that those who would not normally be able to borrow
money will be able to get some if they really need it. You also have to repay
quickly which is different to some other loans, like credit cards and overdrafts
where the debt can be held onto for a long time. Although the idea of flexible
repayments can be attractive, it can mean that you will end up repaying over a
very long time period which can make the interest really add up and the loan
very expensive.




SHOULD I USE A CREDIT UNION RATHER THAN A PAYDAY LENDER?

 * Payday Loans

0

Generally, we may have heard bad things about payday lenders and good things
about credit unions and this may make us think that we should use a credit union
over a payday lender. Although this could be beneficial to us, there are
fundamental differences between how the two work and so it may be that one is
much more suitable to your needs than the other. It is worth finding out more
about how each of them work so that you can decide which one you think will be
best for you.

Credit Unions


Credit unions tend to be local lenders associated with a group. They might be
run by a local church, for example and they will have restricted membership. It
might be that you will have to be part of the group in order to be able to use
them or that you have to live in a certain area. Some local areas may have more
than one with different joining criteria. If you are interested then you will
need to find out whether there are any local to you and if you are able to join.

Credit unions tend to run as non-profit companies and their staff are often made
up of some volunteers. This means that they do not have the same costs as
regular lenders and they can therefore lend at cheaper rates. However, they may
have criteria attached to lending. Some will want you to have been a member and
making regular deposits into a savings account for a certain amount of time and
others may require you have a certain level of savings. All rules will be
different and so you will have to contact them to find out.

They will often be prepared to lend to those who do not have a good credit
rating or have been turned down for loans elsewhere. As they deal with each case
individually then they will need to talk to you and ask you to explain how much
money you need and how you plan on repaying what you have borrowed. They may
even set the number of repayments to suit your budget. They will then have to
apply for you and it may take a while before they can get back to you and let
you know whether you can have the loan or not. You will probably have to go to
the local branch to discuss it with them and some are only open a few days a
week during normal working hours. You will therefore need to make sure that you
are available at this time.

Payday Lenders


Payday lenders normally lend to anyone in the UK as long as they have a bank
account and an income. There are likely to be a lot of different payday lenders
that you will be able to choose from. It is usually very easy to apply for a
loan with them online or over the telephone and some can arrange those loans
within a few hours. There may be some that have local branches, but this will
depend on where you live and whether you have high street lenders. There are
more to choose from if you look online. You will have to prove that you have an
income so that they can set up a direct debit on the day you get paid so you can
repay the loan in full on the day that you get paid. This can be good as the
loan does not last long, but it can be harder to manage the repayment as you
will have to find it all at once. You also then need to manage for a whole month
until you are next paid on significantly less money.

Which is best?


It can be very difficult to choose between these lenders but it will depend on a
number of factors. Obviously, you will need to have a local credit union that
will accept you as a member and lend you the money that you want and you will
have to be available at the times that they are open to arrange it. You will
also need to be prepared to wait a while for the loan to be organised. A credit
union tends to lend at lower rates and you will have more flexibility over
repayments. They will want to set the repayments so that you can afford them.

A payday loan can be set up much more quickly and they are more likely to accept
you. You will also be able to choose between lots more lenders. However, they
are likely to be more expensive and you have to repay the loan in one lump sum,
which can be tricky to manage.  

So which is best can depend on what is available to you, how quickly you need
the loan and how easy it will be for you to manage the repayments.


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 * Why is Interest on Payday Loans so high?
 * Should I use a Credit Union Rather than a Payday Lender?

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