Last Updated:. A typical loan involves two parties; the lender and the borrower. The lender provides the borrower with a particular sum which is expected to be returned in full along with an interest surcharge. The surcharge compensates for multiple risks that the lender takes on such as the credit default risk (the probability that a borrower would default), exposure risk (the risk of opening up to exposure), and in some rare cases, country risk as well (the probability of foreign assets being frozen by the government). The higher the risk, the higher the premium. Payday loans full into the high risk category
A payday loan works on exactly the same principle. The lender lends out the required amount to the borrower with a premium expected to be returned with the principal amount. However, these loans have a shorter term period than conventional loans, usually under a month. This is also why they are called Payday loans in the first place; the principal and interest payment are to be returned upon the borrower’s next pay check.
Payday loans generally allow you to borrow up to £2,500 from an online lender and the repay on your next pay date. The money is transferred to your bank account in one lump sum and the borrower must repay the loan amount and interest when their salary next goes into their account, usually the last Friday of the month.
Depending on the lender, first time customers can borrow up to £500 but once you have repaid a loan successfully, you can borrow as much as £2,500, depending on the lender. The amount you can borrow will depend on a number of factors including your credit history, income and the lender’s criteria.
Since the loan will be repaid on your next pay date, a typical payday loan will last 7, 14 or 21 days but some lenders will allow you to repay up to 60 days later or repay over 3,6 or 12 months in instalments.
Repayments are made automatically by the lender on each pay date using a process known as Continuous Payment Authority. This allows lenders to collect repayments from your debit card in one smooth transaction so you don’t have to worry about making a manual payment on your pay date.
Payday loans are classified as unsecured loans, meaning that they aren’t backed by a solid line of credit such as the borrower’s credit history or FICO scores. The only document that the lender holds on to is the borrower’s next pay cheque. If the cheque bounces, the lender has the right to deduct additional fee upon collection. These days, it is also common for lenders to have electronic access to a borrower’s bank account in lieu of a physical cheque.
Due to the low eligibility requirements, it’s relatively easier for borrowers to acquire a payday loan as compared to a normal one, especially if the borrower has a blemished credit history. In fact, many lending institutions often advertise “no credit checks” in order to attract more customers.
On the flipside however, payday loans have a shorter term period as compared to long term securitized loans. While the average mortgage length in the U.K is 25 years, the term length for these loans is generally about 2 weeks. Though they may be refinanced through the same vendor, many governments are now outlawing this practice. The borrowing amount is generally small, ranging from £200 to £2500.
The loans also have a higher interest rate as compared to traditional loans. This is because the loans are subject to higher credit default risk as a result of the lower approval requirements. The average premium range on a 2 week payday loan is about £15-£25, which amounts to an APR of almost 400%.
This seems to be much higher than the APR on a credit card, which is about 13%, and is cited by many as one of the reasons why Payday loans are unfair to the borrower. It must be noted however that the figure is often misrepresented. A payday loan is supposed to be a onetime loan to help the borrower in case of a liquidity crisis so multiple loans and compounding are not to be expected. Credit card vendors, on the other hand, rely on continuous borrowing and monthly compounding in order to generate profits.
To apply, simply click on one of our featured lenders in the table above. This will take you directly through to their website where you will be asked to fill in the application and if successful, the funds will usually be transferred to your bank account on the same day.
We are a direct affiliate of the companies we feature and we are passionate about working with direct lenders only. We do not take any of your details and sell them onto any other companies and our service is completely free to use.
The criteria for payday loans will vary between lenders but the general requirements are as follows:
An online application will only take around 5 minutes to complete and once you have filled in all your details, the lenders will carry out a series of a checks to see if you are eligible for a loan.
Most lenders require a certain credit score or affordability prior to approving a loan. You may be required to confirm some details over the phone and verify your employment by providing a copy of your pay-slip or bank statement. Some companies may also accept past payment proofs such as payment stubs or cashed cheques instead. By checking your salary, the lender can match up how much you wish to borrow with what you can afford to repay and therefore find the best loan product for you.
Although a minimum credit score and level of affordability is required, there are also lenders who offer bad credit payday loans and for those people on benefits. Finally, a relatively healthy checking account would also be required for verification.
If you application has been successful, the funds can usually be transferred to your debit account electronically within one hour, one day or 48 hours.
Payday loans have received a lot of bad press over the past few years, and for good reason. The interest rates on these loans are very high as compared to other financial instruments such as bank loans. Because of this, borrowers often tend to get stuck in a debt cycle as they are not able to pay off the fee, let alone the principal amount. But the problem isn’t the interest rate; it’s high in order to compensate for the default risk associated with low credit worthy borrowers. Part of the problem lies with the borrowers themselves.
The average Payday borrower is white, female and ranges from 25-44 years old according to a study by The Pew Charitable Trusts. However, other groups have also been identified as more likely to apply for a loan, most notably those with income below $40,000 a year. But that’s not the most interesting highlight of the study; it was also found that borrowers usually take a loan to meet recurring expenses, not for onetime expenses.
There have been several reports of debtors borrowing money to fund lavish purchases such as laptops and even cars. Payday loans aren’t supposed to be treated like normal loans in the first place; they are supposed to be a onetime thing to bail a person out during times of despair. This is why many government officials in the U.K. have proposed amendments to regulate how borrowers use Payday loans.
Payday loans are typically used for short-term emergency expenses. So if you have a broken down car, an expensive medical bill or a boiler on the brink but you don’t have enough money that month to cover the cost, the idea is that the loan will help tide you over until payday. So when you next receive your income from work, you can repay your loan and be in a better financial position.
When you need money because of something urgent, you need the money fast so you can understand why borrowers in the UK look for payday loans online where you can receive funds within the hour.
It is best to have money saved away for a ‘rainy day’ and this usually involves having around 3 to 6 months of your salary saved in a bank account or a safe place and only using it for emergency purposes.
However, we appreciate it is not always easy to save money and especially when you have an emergency which comes from out the blue, you sometimes need a little extra finance to help you through the month. With Quiddi Compare, you can assess your options and compare the different rates offered by lenders and for how long, allowing you to make an informed decision on your loan.
Borrowers can save a lot of money if they compare payday loans effectively. This is because all payday lenders have different rates of interest and terms of the loans that they offer.
Recent studies carried out by the Competition Market Authority showed would typically apply with the same lender over and over not realising that there are cheaper alternatives available. By finding a cheaper payday loan, the average customer could save over £100 a year. Source: Gov.uk
Payday lenders offer their rates in the form of APR and this refers to the Annual Percentage Rate. It might be confusing that the percentage is in the thousands but this is because APR is based on the payday loan as if it were taken out for an entire year and therefore has been multiplied. APR is the consistent measure of interest of all loan and financial product so it serves as a useful comparison tool.
Other ways to compare payday loans involves looking at the daily interest rate that has been capped at 0.8% per day or the cost per £100 that has been capped at £124. Please also use the repayment examples we have provided to give you a better idea of what you would repay. Any repayment example below this price cap suggests a very competitive rate. You can read more here about understanding the costs of payday loans.
When using a payday loan comparison tool like ours, you should be able to find a lender that suits what you are looking for – whether you want to repay over a longer period of time or if you need to find a lender that can transfer funds immediately.
The best payday loan lenders are those that carry out affordability and credit checks, handle your data securely and allow you to repay your loan early. So if you decide that you have the funds earlier than your pay date and are ready to repay sooner, you have the flexibility to do so and save money in the process. This is because you will only be charged the daily interest that you have accumulated up to that point. To give an example, if you have a 30 day loan and decide to pay after 20 days, you will only pay 20 days worth of interest and therefore not have to pay the full amount.
Using a comparison site, you may also find new payday lenders that have just entered the market and offer more competitive rates. We are always looking to feature new lenders and partners on our website so they can offer competitive rates for our customers.
If your application with one of our chosen lenders is not successful, your details will not be sold on to any other third party companies and no fees will be deducted from your account.
Borrowers must be vary of applying with too many lenders because every time you do, the company will run a credit check and this will leave a footprint on your credit file for around 12 months.
So if you make too many applications in a short space of time, it will negatively impact your credit rating and show other lenders that you are in desperate need of cash.
When applying, always provide accurate and correct information, as you may be required to prove things like employment status and income later on.
If you cannot make your loan repayment on time, there is usually a one-off default fee charged by the lender which is a maximum of £15. In addition, a mark will be left on your credit file stating that you have missed repayment – so this could affect your ability to access credit in the future.
Lenders are required to offer forbearance and flexibility so always get in touch quickly if you know that you are not going to be able to repay on time. Several of the good companies we deal with will allow you delay your repayment or set up an arrangement to pay lower amounts without damaging your credit score. Read here for more information.
Some vendors will offer rollovers whereby your extend your loan, but this can get expensive very quickly so only pursue this if you have considered how you are going to pay off the debt.
Payday loans can be an expensive form of finance and should only be taken out for genuine emergencies and not to fund a material lifestyle. Borrowers should always consider how they are going to repay their loan before applying.
There are several alternatives available where you can borrow up to £2,500. Whilst these may seem cheaper, they may require you to put something down as collateral or you may have to wait longer to receive your funds.
One of the smartest and most affordable alternatives to payday loans is borrowing from a credit union. With a typical APR of 26.8%, these not-for-profit organisations allow you to borrow a few hundred pounds at low rates. However, to be eligible to borrow from your local credit union, you must have a job in the public sector such as teacher, nurse or policeman. Also, the funds may take between 1-2 weeks to be transferred to your account.
Guarantor loans allow you to borrow up to £7,500 for as long as 5 years provided that you have an extra person involved in the transaction to act as your ‘guarantor.’ This person is likely to be a close family member, colleague or friend and they will agree to cover the cost of your loan if you cannot. With an APR of around 49.9%, this product is ideal for those with bad credit as the borrower is able to benefit from their partner’s credit rating in order to get the funds they need.
Logbook loans enable you to release the equity from your vehicle in order to borrow money. By putting your car, van or bike down as collateral, this secured loan lets you borrow up to £50,000 and repay in monthly instalments over 3 years, but you risk the repossession of your vehicle if you are unable to keep up with repayments.
Credit cards are one of the most popular and simplest ways to borrow money. By receiving a ‘credit limit’ based on your financial circumstances, you are able to borrow a certain amount and repay the balance at end of the month – so it is like a loan because you are getting the money up front. However, you must be conscious about paying on time because the cost of going into your overdraft can be more expensive than a payday loan. Source: The Telegraph.
For an instrument that has been in use for the past two hundred years, Payday loans have faced a radical series of transformations. From being completely unregulated to being a billion dollar industry, Payday loans have been subject to a lot of skepticism from critics.
Even though the industry is now heavily regulated through interest capping and other restrictive measures, there’s no denying the truth; Payday loans aren’t going away anytime soon. People need money, not for lavish spending, but to afford basic sustenance items. Often times, they may fall back on their payments and might not have the means or credit score to acquire a loan.
Banks may seem like a viable option on paper but the tight lending criteria, especially after the 2008 financial crisis, makes it very difficult for a middle income person to get a loan. As such, there will always be someone looking to garner profit by issuing short term loans with a higher risk.
With the advent of the internet, getting a loan has now become much more convenient as there are no extensive forms or documents that need to be produced. As mentioned previously, traditional payday loans are expected to be phased out completely within the next 5 years. But with online paydays, it has become harder for lenders to conduct background checks to assess the real default risk that they face. This is often cited as one of the reasons why premiums are rising for Payday loans.