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Before you take out any loan it is really important to make sure that you understand exactly how the loan works and how much money you will need to pay back.
You would never take out a bank loan or a mortgage without reading the fine print first. Payday loans should be no different.
When you are planning your loan it is really important that you understand all the jargon, like ‘APR’ and ‘compound interest’, for example, and how they will affect your loan.
What is compound interest?
Compound interest occurs when the interest that is added to your loan also incurs interest. This means that the interest is paid on the total amount owed – so an interest rate of 1% per month on £100 would mean that the second month’s interest would be based on £101 rather than £100, and so on.
This yearly rate of interest is often referred to as APR (Annual Percentage Rate).
What is APR?
APR is the standard way of measuring how much a loan will cost you per year. The usual rate per month of a payday loan is around 25%. Over an annual basis, this gives an APR of 1737%.
It is the law that all payday loans companies must clearly display the APR on all the information that they provide about the loans, but the problem with APR on payday loans is that is that it is a yearly calculation, while payday loans are usually paid back within one month.
This means that the APR on payday loans is always very high and can sometimes scare people off, but it shouldn’t.
A better way to think about it is that you will have to pay back 25% of the loan amount on top of the original sum you borrowed, so for every £10 that you borrow you will need to pay back an extra £2.50.
How important is APR to a same day loan?
The most important thing about any loan is making sure that you know exactly how much money you will need to pay back, and when.
The full cost of your same day loan will always be made clear to you before you apply, and there will never be any hidden charges. This means that the APR rate shouldn’t matter too much to your same day loan, provided you make sure that you repay the money on the agreed date.
You will be required to give your bank details when you apply for a loan, and the money will be paid directly into your account after your application has been approved.
You will have to pay back your loan on your next payday, and you should always make sure that you have enough money to cover the repayments.
In the same way that the money is paid straight into your bank account, it will be taken directly from your bank account on the day that it is due to be repaid. You must have the money in your account or you will incur late payment fees.
Payday loans are short term loans designed to help with for short term cash flow issues, and should only be used as such.
A payday loans should never be thought of as a long term solution to serious debt problems.
All loans carry certain degree of risk and you should never apply for a loan without first making sure that you know exactly what you are getting into to, and exactly how much you will have to pay back.
If you are unsure before you apply, contact an adviser who will help you understand your loan.
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