Payday Loans:Friend or Foe?
Payday Too Far Away?
Unless you're fabulously wealthy with no money worries, there may well come a time when a surprise expense slaps you in the face and a payday loan is required. The law of Murphy would suggest that this bill or expense will arrive during a month when you are already on the bones of your bottom! Houses and cars are particularly prone to breakdown and disrepair and a horrible shock may just be around the corner. Imagine; you come in from work on a cold January evening after having walked the mile from the train station. The only thought that got you through the trek was that of a cosy warm house, slippers and perhaps a roaring fire. You step through your front door and realise that it's actually warmer outside than it is in the house. You know you have paid your gas bill this month and you know you set the thermostat before leaving this morning so what on earth is going on.
A desperate march to the boiler ensues and an even more desperate attempt at pressing buttons and turning dials follows in an utterly futile attempt to get as flame going. It's so cold the windows on the inside of the house need de-icing and your fingers wont follow the simplest of instructions. Out come the yellow pages as you begin looking for boiler engineers accompanied by the word cheap. After several fraught minutes of searching, you choose the cheapest looking ad in the section and pick up the phone.
The maintenance man is filling you with doom as he sips on his tea and quizzically shakes his head. The call out charge alone will clear you out for the month and it's only the 9th! Then the dreaded prognosis is delivered; a new boiler and an outlay of £500! You are broke but dread the thought of sleeping in an outdoor coat and boots for the rest of the month. What do you do?
A Cash Advance?
Payday lenders have really come to the fore in the last three years after the drying up of loans from traditional lenders due to the credit crunch. There are a number of companies out there that offer very short term loans for short term problems. On the face of it these loans are extremely expensive with astronomical APRs and this is usually true. However there are some benefits to using these services if you look beyond the obvious cost.
In years gone by, most people who are faced with a short term cash flow problem would either simply get a bank overdraft or allow themselves to go overdrawn on an unauthorised basis. Unauthorised overdrafts carry two charges. Firstly you are hit with an initial fixed cost that can be anything up to £40 in the UK, that's $60 in the US! If that's not bad enough, you can then be hit with a high interest charge for every day you remain overdrawn. All of a sudden that £600 is now £700 - and things can get even worse!
Many banks will send you a letter informing you that they will deduct these unauthorised overdraft charges on a specific date. What they don't care about is actually when you get paid. Although this date can often be changed on request, many people forget to try and a charge is then deducted from an account already overdrawn and accruing interest charges. You may then find yourself in the position of paying interest on interest and bank charges!
What is called for here is a calm head and some deep thought. Many payday loan lenders will charge you interest by the day. If it's already nearing the end of the month, the resulting interest charge might be significantly less than the charges the bank might bestow on you! Below is an example of when it might make sense to use this option instead of going to your own bank.
Payday Loan Example
Imagine you needed £400 for an unexpected expense but payday was 8 days away. You have two options given the bank have refused an overdraft extension:
1. Write a cheque and go overdrawn. This will either bounce and cost you more money or clear, resulting in a £40 charge plus maybe another £5-£10 in daily charges - that's up to £50
2. Use a payday lender with an APR of over 2500%. Now I can imagine the shrieks of horror that are now being directed to computer screens over the world, but if you know you have the money to cover it the cost might be as follows:
Borrowing £400 + Interest & fees £37.50 = Total to repay £437.50(I got this figure from an online payday loan provider)
This saves you £12.50! The nearer to payday you are, the more financial sense this makes.
However, this is reversed the further away from payday you get. If the money is required at the beginning of the month, the bank may well be the way to go. The point is you have the option and it should be explored to work out the cheapest option.
The Cash Advance Process
Most of the companies with government accreditation have online application processes. This involves the following information being given.
- Address(s) for the past three years.
- Phone number
- Email address
- Salary details
- Day of the month you are usually paid
- Details of employment for the last three years
- Debit Card Details
- Bank Account Details
Make sure that when you apply you have checked the site out through testimonial, forums and reviews. Also make sure that you have checked with a government accreditation body that this company is fully licensed. The CFSA website in America and the FSA in the UK are great places to start.
The payday loan provider will then perform some security checks which will include a dredit checks. For those with poor credit, many companies will still accept you or ask for a guarantor. There will also be some physical checks such as a phone call to the number provided or an email to the supplied email address. You can also expect to be asked for three months worth of payslips or bank statements to prove your ability to repay the loan.
With many institutions, the money is then wired straight to a bank account on the same day although others may take up to 3 days. Before this happens however, a credit agreement will be mailed to you which needs to be electronically signed and retuned. It is important to check this at it will state the exact amount to be repaid and the date.
If Things Don't Go As Planned
I mentioned earlier that these loans are only cost effective when taken for a few days. This is absolutely the case and any longer than that means they become an extremely expensive option. However, imagine if in the next month, your car breaks down with £300 repair bill slapping you in the face like a wet fish! All of these emergency cash lenders offer the option of deferring payment month by month for up to as many as six months. Whilst this can be a welcome buffer, the decision to defer should never be taken lightly. The lender will insist on an interim payment that will leave the outstanding balance either exactly the same or even more!
Like all credit, it should be examined very closely before being used. Other options such as borrowing from a friend or family member are usually interest free and promote love and goodwill. Can you sell your old car, unused games console or tatty old bike on ebay? Only when all avenues have been explored and only when it becomes cheaper than going overdrawn should this type of loan be considered. Although they can be very welcome in times of need, they come with a price!
Be Careful! Watch this video for a payday wake up call!
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