We take a look at how payday loans work

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For some people, a payday loan can be a lifeline should they run out of cash just before payday. It allows them to borrow a small amount of money to deal with an emergency expense that may have arisen. Then, they can pay back what they’ve borrowed quickly.

However, over time, people have decided to look into a new type of loan that offers them more time to pay back what they have borrowed. Short-term, instalment loans are now a common choice with many borrowers as they don’t require you to find the funds plus interest in such a short space of time. The loan, depending on how much you borrow, can be spread across a number of monthly payments, giving you more time to pay back comfortably.

If you still believe a payday loan may be the best option for you then you’re likely wondering how they work. New legislation and regulations by the FCA mean that all loans are heavily monitored now and lenders must meet strict requirements to ensure they lend fairly. With this in mind, we’ve looked into how payday loans work now and what to consider before applying to borrow money via one.

How do payday loans work?

The premise of a payday loan is very simple. It is a loan you take out before your wages are paid, to cover those last few days when money might be low or you need to deal with an emergency expense. Here’s a step by step guide to the payday loan process.

Step One – Self-evaluation

If you’re thinking about a payday loan, you must first consider if you are eligible. You should also check that your credit score is healthy enough to apply without damaging your rating if you are not accepted. The same rule applies if you’re considering a short-term loan, like those available through Sunny.

Step Two – Application

Next, you will apply for the payday loan in the amount you require and the lender will confirm if you are accepted or not. They will conduct credit and affordability checks to determine whether you are able to pay back the amount borrowed or not.

Many lenders require that you apply online and some offer a soft credit check to determine how much you are likely able to borrow. Sunny’s broker partner works with a panel of lenders that provides such a service. They can check your credit history and confirm the value of the loan you’re likely to be accepted for. This doesn’t leave a marker on your report and gives you an idea of whether you should go ahead and submit a full application or not.

Step Three – Payment agreement

Most payday lenders require payment within 35 days and if you have accepted their loan offer they will now confirm when your payment will be taken. This amount should include interest and it’s important you now consider how you will ensure you have enough money to cover it.

Step Four – Money received

You will receive your loan and are now able to use it for that emergency expense or to cover an end of the month bill. The loan will usually be paid directly into your bank account for you to access as needed. You can send the money via bank transfer to the payee or even take it out as physical cash at an ATM to cover a cost.

Step Five – Payment is taken

On the date you agreed earlier, the payday loans company will take payment. Ensure you have enough money in your bank account on this date to cover the cost and to avoid rolling your payday loan into the next month, which can lead to a cycle of debt that is hard to recover from.

If you were to opt for a short-term loan instead that can be paid in instalments, you could have a longer repayment period that could help you balance your budget and spread the cost of your borrowing.

Representative 89% APR

Representative Example: Borrowing: £1000 for 18 months, Total Repayable: £1853.43, Total Interest: £853.43, Interest Rate (Variable): 89.9%. Rates between 9.3% APR and 1721% APR – your no-obligation quote and APR will be based on your personal circumstances. Loan term lengths from 3 to 36 months. Subject to lender’s requirements and approval.

Sunny Loans is a registered trading name of Upward Finance Limited, who is an introducer appointed representative of Flux Funding Limited, who is a credit broker, not a lender. Loan repayment terms are 3-36 month loans.

Warning: Late repayment can cause you serious money problems. For help, go to www.moneyhelper.org.uk.

Choose a loan that's right for you

Now that you know how payday loans work, it’s time to consider what is best for your situation. Take a look at our guides below that look into several types of loan, to work out which is the best option for your situation.