Although tens of thousands of new payday loans are taken out every day, for many borrowers it’s often a brand new and daunting experience.
However, if you can see through the many different lenders offering different interest rates, borrowing terms and lending criteria, the process is a relatively easy one.
This easy to follow guide is designed to give first time borrowers a basic understanding of what payday loans are, how they work and how to go about finding the right lender.
What are payday loans?
Payday loans are small unsecured loans taken out over a relatively short period of time — they’re also know as short-term loans. Typically, repayment terms range from 1 to 12 months in duration.
Payday lenders are not banks, they are firms authorised to provide consumer credit. In the UK, any firm that provides consumer credit is regulated by the Financial Conduct Authority (FCA.
Payday loans are a form of instant credit. The process is extremely quick with most lenders promising to fund loans within an hour of application.
Unlike traditional lenders, many payday lenders will consider applicants with poor, little or no credit history.
How payday loans work
While payday loans are available in-store, most people choose the convenience of applying online and having the funds transferred directly into a bank account.
There are basic requirements that apply to all payday lender loans.
- be at least 18 years old;
- have a regular form of income.
However, lenders may also have additional lending criteria.
Online application process
The process starts by filling out a simple online application form, which takes around 10 – 20 minutes to complete. Sites that claim you can complete an application in 2 minutes are misleading.
Once completed, the application is submitted for approval. A decision is usually made by the lender straightaway.
Other than a ‘Yes’ or ‘No’ answer, the lender may say ‘Yes, subject to full approval’. This means that the lender needs more time to carry out further checks. In this instance, during normal working hours, approval should still take no longer than 30 minutes. It will always involve a credit check with a reference agency.
If approved, the money will be sent direct to you bank account. Most lenders have a regular transfer schedule, usually hourly or faster. In the UK, all major banks operate what is called a ‘Faster Payments’ service, which ensures the money is available almost instantly after it is transferred.
Save money by choosing the right loan duration
Payday loans are an expensive form of borrowing but thankfully they’re also very flexible, which is something you should take advantage of.
One way to decide how long to borrow is to base your decision on affordability. First calculate how much you can comfortably afford to repay each month (leave yourself some wiggle room) then simply work out how many months you need to pay off the total amount (including interest of course). Payday loans are configurable in monthly chunks so you can choose the exact repayment term you need with no waste. Here’s another take on how to choose the right payday loan.
If your finances are more fluid and you’re not sure exactly how long you’ll need to repay the loan, try to find a lender that allows early settlement without penalties. You can then err on the side of caution and choose a longer term without being tied in if your situation proves better than expected. A £500 loan repaid 1 month early could save up to £120 in interest charges!
How to compare the cost of payday loans
APR is a standard way to compare the cost of loans. However, APR is only an average rate — it may not be the rate that you’re personally offered. Also, some lender interest rates vary considerably depending on the term you choose.
Instead, use the calculator on the lender’s website to work out the total cost of the loan you need. Calculators tend to be at least 99% accurate and you’ll find it much easier to compare loans on a like-for-like basis. Calculators aren’t 100% accurate because some lenders display an illustrative figure rather than an actual figure — usually based on a 30 day month and/or using an estimated repayment date.
Ignoring the small print can be costly
We’re not suggesting you read all the small print but do ensure that you at least check out the main product features and the lenders late/missed payment policies — as we’ve already pointed out, a penalty free early settlement can potentially save you £100’s.
Know who you’re dealing with
Make sure you’re dealing with a proper authorised firm — there are some rogue websites out there who want to steal your personal details or fix you up with loan sharks.
If you find yourself on an unfamiliar website, you can easily check the firm’s authorisation using the Financial Services Register.
Here’s what to do:
- Go to the Financial Services Register.
- Find the Firm Reference Number (FRN) in the footer of the website.
- Go to the register and use the FRN to search for the firm.
- Go to the ‘trading names’ section and check that the website is a valid trading name. In the example below, look for peachy.co.uk or Peachy loans rather than Cash On The Go.
Can’t find the FRN or a matching trading name on the register — run away!
Are there any shortcuts to find payday loans quicker?
There are a couple of shortcuts that help cut down the leg work when searching for payday loans:
- Payday loan brokers provide access to a range of lenders with just one application. Lenders are filtered down to the ones that match your circumstances, then your details are submitted to interested parties until an offer is found. You can get approved very quickly using this method and it takes the least effort.
- You can use a payday loan comparison site to gather a short-list of reputable lenders. You may also be able to filter your results further (by amount, term etc.) using information on the comparison site. This may still seem like a long-winded way to find a loan but it’s much more efficient than stabbing in the dark, which is what searching on Google is.
Here’s a bonus — because loan comparison websites and loan brokers are also regulated by the FCA, they will have carried out due diligence checks on all the payday lenders they work with, so you can be confident they’re safe to use.
Happy loan hunting!