There are lots of different ways to borrow and each is designed to target different borrowing needs. For example, a credit card can help you spread the cost of a medium sized expense over several months, so that when you don’t have time to save up in advance, you don’t have to ruin your budget. A personal loan from a bank might help if you need to build an extension – perhaps your family is growing or you’re moving your parents in. While you might have some funds saved, large expenses like this are hard to squeeze out of a regular income, so repaying over years instead of months makes it much more manageable. But when it comes to small expenses, less than £1000 and often in the low hundreds, there can be limited options for borrowing. Coupled with a less-than-excellent credit score, it might feel like there aren’t a lot of credit products to help you.

What is a payday loan?

A payday loan belongs in the family of instant short term loans. They are small loans you can borrow for a short period of time, typically 30 days, to help you manage the occasional cashflow issues you might face throughout the year.

Advantages of payday loans

Applications and loan transfers

Payday loans have a lot of benefits which make them a popular way to borrow. Payday loans are available online, so you can access the application from wherever you are, and most lenders use an automated algorithm to assess the application so that you can apply any time of the day and receive a decision almost instantly. This reduces the time you spend waiting to find out if you have been approved and means that whatever the emergency, you could have the funds to help you on the same day. The application forms are generally very quick to complete, and if your application is approved, the funds could even be transferred to your bank account on the same day, even on weekends and bank holidays. This gives you maximum flexibility to spend the loan on your unexpected payment, whether it’s by standing order, direct debit or even just using your debit card.

Bad credit consideration

One of the reasons payday loans can help is their higher acceptance rates for people with a poor credit history or low credit score. Often with mainstream creditors, you have to have a very good credit record to be considered and it can lead to some demographics being financially excluded. Given we all face similar financial ups and downs throughout our day to day lives, it seems unfair that only some people – who may, through external circumstances – have better access to credit than others. There are usually reasons for having a poor credit history, but sometimes those reasons no longer apply or are out of date, which is why payday lenders typically review applications from a wide range of credit scores.

Short loan duration and small loan amounts

Depending on why you need to borrow, the loan period can be a big advantage, because being able to settle the balance on your next payday means you don’t have the debt lingering over for you for longer than necessary, and you can get back to your normal budget as soon as possible. Having the option to only borrow a few hundred pounds (instead of thousands) also means you are only paying interest on the amount you need, rather than the amount available. You can therefore service any surprise bills without compromising your financial commitments long-term.

worried man at a desk

Disadvantages of payday loans

There are always two sides to every coin, and it would be biased to only note the advantages of payday loans, because while they can help a great range of people resolve cashflow shortfall and emergency expenses, there are factors you should take into consideration before applying for a payday loan.

High interest rates

Payday loans have a very short loan duration which means lenders only have a small window to recoup the costs of running the service. This is reflected in the high interest rate, though be aware that the noted annual percentage rates (APRs) can often be misleading because these loans have a total cost cap of 100% of the amount borrowed. Payday loans in the UK are regulated by the Financial Conduct Authority, and there is also an interest cap on how much lenders can charge. This cap works out to 80p per day per £100 borrowed. This used to be up to ten times cheaper than an unauthorised overdraft before the overdraft reform a few years ago. Payday loans are an expensive way to borrow, which is why they should only be used in emergency situations and after careful consideration.

Short loan duration

While this may be an advantage as outlined above, having only one month to repay the full balance could be an unaffordable solution and might affect your upcoming responsibilities. There are instalment loans available now and these tend to be more popular than payday loans, with some short term lenders only offering instalment loans. Instalment loans are almost the same as payday loans, but instead of having one repayment date, the repayments are spread over multiple months, typically three or six but you can sometimes borrow for up to twelve months. Finding long term loans online is just as easy as looking for payday loans online.

Before you borrow

If you’re faced with an unexpected expense, you might consider using a payday loan or even an instalment loan. But before you borrow, you need to make sure the loan repayments are affordable and will not affect your finances in the future. Payday loans are very quick to apply for, which means you can spend an extra minute or two thinking about any upcoming planned expenses which may render the repayments unaffordable. Missing your loan repayments results in negative markers being reported to your credit file which only makes it harder to access credit in future. You shouldn’t have to stress when faced with a financial shortfall, but you should also take care of your future financial wellbeing by making informed and responsible borrowing decisions.