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Are you asking How Do Payday Loans Work? A payday loan is a short-term, high-interest loan that is typically used to cover emergency expenses. These loans are typically for small amounts of money and have a very high-interest rate. Payday loans are designed to be repaid quickly, usually within two weeks. However, many borrowers find themselves unable to repay the loan in full and end up rolling over the loan or borrowing again. This can lead to serious financial problems. Before considering a payday loan, make sure you understand how they work and what the risks are.

What Is A Payday Loan?

A payday loan is a very short-term loan. That’s short-term, as in no more than a few weeks. They’re usually available through payday lenders operating out of storefronts, but some are now also operating online.

Payday loans work best for people who need cash in a hurry. That’s because the entire application process can be completed in a matter of minutes. Literally!

A payday lender will verify your income and a bank checking account. They verify the income to determine your ability to repay. But the bank account has a more specific purpose.

How Do Payday Loans Work?

When your loan is approved, the funds are deposited into the verified bank account. But even more important, the lender will require that you write a postdated check in payment of both the loan amount and the interest charged on it.

For example, let’s say that you’re granted a £500 loan on October 16. Since the loan will require repayment within two weeks, you will write a check back to the lender that’s dated October 30. The check will be for £575 – £500 for their loan repayment, plus £75 for interest.

The postdated check ensures that the lender will be paid back by the scheduled date and that they won’t have to chase you to get it. Borrowers tolerate the postdated check arrangement because the other major component that lenders normally look at, credit history, is ignored by payday lenders. That’s why they’re called payday loans.

Payday loans may seem to offer a quick solution, but they only postpone the problem. If you've borrowed £200 this month, and £250 (repaying the loan plus interest) is taken out of your salary on your next payday, how are you going to make sure you're not short again at the end of next month?

Spending more money than you earn is a classic reason people get payday loans. Doing a proper budget will give you a clear picture of where you are overspending. Many payday lenders have access to borrower's bank account due to repay payday loans but it's also an issue.

How Payday Loan Interest Rates Are Calculated?

Part of how do payday loans work are the interest rate calculations. The annual percentage interest rate (APR) for payday loans is calculated by dividing the amount of interest paid by the amount borrowed; multiplying that by 365; dividing that number by the length of the repayment term, and multiplying by 100.

In mathematical terms, the APR calculations on a £375 loan look like this:

56.25 ÷ 375 = .15 x 365 = 54.75 ÷ 14 = 3.91 x 100 = 391%.

For the £20 per £100 borrowed (or 20%) on a £375 loan, it looks like this: 75 ÷ 375 = .2 x 365 = 73 ÷ 14 = 5.21 x 100 = 521%.

Again, the APR is astronomically higher than any other lending offered. If you used a credit card instead, even at the highest credit card rate available, you are paying less than one-tenth the amount of interest that you would on a payday loan.

Payday Loan Alternatives

There are other ways to find debt relief without resorting to payday loans. Community agencies, churches and private charities are the easiest places to try.

1. Paycheck Advance

Many companies offer employees a chance to get the money they earned before their paycheck is due. For example, if an employee has worked seven days and the next scheduled paycheck isn’t due for another five days, the company can pay the employee for the seven days. It is not a loan. It will be deducted when the next payday arrives.

2. Borrow From Family Or Friends

Borrowing money from friends or family is a fast and often the least expensive way to dig yourself out of trouble. You would expect to pay a much lower interest rate and have a far more generous timeframe than two weeks to pay off a loan, but make sure this is a business deal that makes both sides happy. Draw up an agreement that makes the terms of the loan clear. And stick to it.

3. Credit Counseling

Nonprofit credit counselling agencies offer free advice on how to set up an affordable monthly budget and chip away at debt. They can direct you to places in your area that offer assistance with food, clothing, rent and utility bills to help people get through a financial crisis.

4. Debt Management Plans

Nonprofit credit counselling agencies also offer a service, at a monthly fee, to reduce credit card debt through debt management plans. The creditor offers a lower interest rate to the agency, and you can agree whether to accept it. The agency pays the creditors, and you make one monthly payment to the agency, which frees up money so you can pay your bills and reduce the debt. The plan pays off the debt in 3-5 years.

5. Debt Settlement

If trying to keep pace with unsecured debt (credit cards, hospital bills, personal loans) is the reason you’re always out of money, you could choose debt settlement as a debt-relief option. Debt settlement means negotiating to pay less than what you owe, but it comes with a major stain on your credit report and a heavy price on your credit score.

Summing Up

In summary, the above explains how do payday loans work. A payday loan is a short-term, high-interest loan that is typically due on your next payday. The interest rates for payday loans are typically much higher than traditional lending products, but they can be a helpful resource if you need money quickly and have a limited credit history. Take your decision wisely after going through our guides. You can also get a payday loan from our website and contact us now for details.


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