As with any form of borrowing, the
rate of interest applied to a payday loan will often differ from one lender to
the next. This makes it difficult to provide an accurate estimate, however most
are around 25% per month or 1% per day.
The key to finding out which company
offers the best value is to compare the relative rates of a number of different
lenders. Remember though that interest is only one part of the overall cost of
a loan, potentially at least. Some will add on other fees, albeit only a few
pounds in most cases, which can bump up the cost of borrowing. This is why you
need to be able to accurately gauge what the final cost will be.
To get a decent idea of the charges
you're likely to incur, read through the terms of lending on the payday loan
company's website or literature. As well as giving you the base interest rate,
it should clearly indicate any charges that you are likely to encounter. Some
will even provide a slider that will allow you to choose your loan amount,
perhaps even how long you are looking to borrow for, and then automatically
calculate the estimated cost of borrowing.
Regardless of whether this kind of
facility is available, you should still be able to calculate the total loan
amount through the information provided. For instance, as well as advertising
the APR, which can be a little misleading, most brokers and lenders will also
provide the cost for every £100 borrowed. As these rates are generally
standardised, remaining the same regardless of how much you borrow, it's
usually pretty easy to work out the cost.
So let's say you want £300 and the
payday loan company you stumble across is advertising a flat rate fee of £25
for every £100 borrowed. This means that the total cost is going to be £75 and
you'll have to stump up £375 within a month; however, this also assumes that
there are no other charges. So take a look through the website and see if
additional fees are mentioned, if they are, add these into the equation.
This will give you the basis for
comparison that you need in order to weigh up the relative merits of individual
lenders. Looking at APR alone could lead to unfortunate confusion, particularly
as this takes into account the yearly cost of lending, which is somewhat
irrelevant for short-term loans like these. To be charged the full rate of
interest, you would have to miss 12 consecutive monthly payments, at which
point the constant multiplications would amount to a rate of over 1,000%.
Don't take this warning lightly
though. If you know that you're going to struggle to repay the payday loan, the
best advice would be to leave well alone. Whilst you might be able to get out
of a tight squeeze temporarily, failing to have the funds on the automatically
assigned date (usually your next payday) will have major financial implications.
Defaulting on a payday loan will
generally result in an extra month's interest being applied as well as other
extra charges for the added administration costs. Essentially, the £300 loan we
discussed earlier would possibly end up costing nearer £200 once the interest
and fees for two months are taken into account. Suddenly it can become very
expensive indeed.
So generally speaking, the rates on
payday loans are slightly more than the annual interest on credit cards and
personal loans, but not by as much as many would initially think. The true cost
is often 20% or even 25%, but you will need to review individual lenders to
find out their respective rates.
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