How to use payday lending
Payday loans have become popular in the last decade or so, with an increasing number of providers on the market. However, they are often misunderstood. It’s time to set the record straight and explain what payday loans actually are, as well as how you can use them to help you through short-term cashflow problems.
Payday loans are short-term loans that are designed to help you get through the month. Let’s say you’ve been paid, paid all your bills and have money in the bank, but an emergency expense like a car repair comes up; you use the money that’s left in your account, but you’ve nothing to tide you over until you’re paid again.
You don’t want to take out a large, long-term loan because you only need money to get through the next couple of weeks. Payday loans are designed for this very purpose. While some payday loans have the ability to pay over a couple of months instead of just one, allowing you to spread your repayments a little, the premise is that the loan is paid back quickly.
On your payday, you pay back the loan in full with interest and charges. Interest is high, because they are designed for short-term lending.
Tips for using payday loans
What are you using it for?
Before taking out a payday loan, you should stop to consider your purpose. Payday loans are designed for a specific purpose, usually to offset the cost of an unexpected expense. While they can help with a cashflow shortfall between paydays, you should not use a payday loan to cover a reduction in cash flow.
If your income has dropped for one reason or another, using a payday loan to offset this is not a good idea, since you can’t be certain when your income will increase; that means that you might not be able to pay back the full amount plus interest on your next payday, which could lead you into debt.
However, if you’ve had an unexpected expense and your income has stayed the same, you’ll know that you can afford to pay the loan back when it’s due. Payday loans are specifically for this kind of situation.
Can you afford the interest?
A responsible borrower should always look at all the details of any credit product they take out. That means that you should check the interest payments on any loan and focus on the amount you will need to pay back, not the original loan amount itself.
For instance, if you want to take out £100 but the repayment amount will be £150, you need to make sure you will be able to afford to pay all of this amount back on your repayment date. Being unable to do so will cause the repayment amount to increase significantly as interest is added.
If you don’t pay the full amount back when it’s due, you could find yourself getting into further debt. Avoid this by ensuring that you only take out a loan that you can afford to pay back with the interest added.
Don’t use multiple lenders at once
One thing that you should absolutely avoid is taking out multiple payday loans on the same expected salary payment. If, for example, you take out three separate payday loans with different providers, all on the expectation of paying them back when you’re next paid, those loans will be issued on the basis of your ability to repay.
However, each lender will be unaware of your other payday loans if you take them out within a short space of time; the lenders will be issuing you your money on the understanding that each is the only payday loan you have.
If you need to take out multiple loans in the one pay period, it’s highly unlikely that you’ll be able to afford to pay them all back on your next payday with interest added. This could push you into a spiral of debt as you look to borrow more to pay off existing loans.
To reiterate: payday loans are not designed to help you with reduced cashflow. Instead, they are intended to help you offset one-off, unexpected costs until you are next paid. You should pay off your existing payday loan in full before you consider taking out any more.
As with all lending, if you are unsure about your ability to pay or you find that your cashflow problems are going to last longer than expected, you should seek debt advice, and always take to your creditors as soon as possible.