Getting A Payday Loan— How It Works?
Think about payday loans in UK and some names will click your mind. Payday loans have become a huge industry in UK. However, the British government believes that payday lending may be causing harm to the national economy, which may be improved by educating people about the essentials of financial management. Considering the increasing unemployment in country, it is sometimes hard to ignore payday lending. For some people, it is the only way to manage their financial emergencies.
Is Payday Lending a Borrowing Cycle?
Contrary to the popular belief that payday lending creates a cycle of borrowing, it is a fact that the borrowers create the cycle, and not payday loans. How, you ask? Payday lending works in a unique fashion. People take out payday loans to fulfill their financial emergencies, and return the loan on the salary day. However, it becomes troublesome only when someone takes out a payday loan to return another loan.
Ideally, everyone should save money from their monthly or bimonthly income for emergency funds. However, sometimes payday loans are inevitable. There is no harm in taking out payday loans in such emergencies.
How Payday Loans Work?
Getting a payday loan is simple. Some private lenders have physical space offices for payday lending. Some companies also provide payday loans on online applications.
In the former case, the lender evaluates the credit report of the borrower. Both parties sign the contract after mutual consent on loan essentials like interest rate, and such. The borrower signs a post-dated check and gives it to lender. The lender submits this check in bank account on the salary day of the borrower to receive the repayment.
In the latter case, the borrower fills the online form and automates a post-dated payment to the lender’s bank account. The lender sends the loan amount online and receives the repayment on the salary day.
The repayment tenure ranges from seven days to 21 days.
Are Payday Loans Different from Other Loans?
Payday loans are different from other short-term and long-term loans. These are loans ‘specific for emergencies’. However, the borrower should consider other resources before applying for a payday loan. These resources include their savings, emergency funds, peer-to-peer lending, and employee benefits.
However, if none of the options are available, then you may consider payday loans. Why is it so? It is because the lenders charge around £25 as interest on every £100 borrowed. This means that you take out a loan of £100 and return £125 on the salary day. The lender may also offer you an extension in advance. However, the interest doubles when the borrower seeks an extension.
There are some events when you should not take out a payday loan. For example, you should plan a vacation instead of taking out a loan to join the family vacation. If you take out many payday loans and do not repay them, not only you will be marked as defaulter but your credit score will also decrease. Payday loan affects your credit just like any other loan.