What are payday loans?
Payday loans are a short-term emergency cash solution, designed to be taken out to cover small, unexpected costs. Traditionally, they are repaid when you receive your wages at the end of the month, however these days, what is typically considered a ‘payday loan’ can last longer – for 2-3 months.
The idea behind payday loans is that what you borrow is paid back as soon as payday arrives, which is where they get their name from. However, many people discover that they struggle to pay back the full amount in such as short space of time and need longer to spread the cost.
This is why at Sunny we don’t consider ourselves a payday lender – neither in the traditional sense as we’ve described, or at all. Instead, we offer short-term loans that can be repaid over 6 to 14 months, depending on the amount you borrow.
For now, if you are still looking for information on payday loans, we’ve broken down the basics for you in this guide.
Why might you need a payday loan?
Many people take out payday loans to bridge the gap between receiving an unexpected expense and when their wages land in their account. Paying for urgent car repairs or fixing something that has broken in your home sometimes can’t wait until your wages arrive in your bank account, and so a payday loan can help you cover this cost while you wait for payday to come around.
How much can you borrow with a payday loan?
This depends entirely on the lender you choose. A payday loan provider such as Wage Day Advance offers values from £80 to £500, while with Quick Quid you can apply for anything from £50 to £1,000 if you are a new customer. Sunny provides short-term loans that offer all the same benefits you expect from a payday loan, in values from £100 to £2,500 – covering a wider range of emergency situations.
What can a payday loan be used for?
A payday loan is usually used to cover the cost of an unexpected expense you may be dealing with. Borrowing of this type is an expensive form of credit that, while useful in some situations, isn’t suitable for long-term financial needs. However, there are a few circumstances when you should not use a payday loan. These include:
- Purchasing anything you don’t urgently need: This could be an expense such as a holiday or something new for the home. These are the sort of things you should save up for over time.
- Paying off another loan: If you are struggling with debt, it’s important you seek free and impartial debt advice and do not borrow any more money until you have done so. Contact a not-for-profit debt advice organisation such as StepChange or take a look at the Money Advice Service website.
What are the alternatives to a payday loan?
It’s still possible to get your hands on emergency cash without some of the restrictions and downsides that come with a traditional payday loan. Here are some examples of alternatives to payday loans:
Use your savings
If you have savings, you should always consider using them before borrowing any money. This isn’t an option for everyone, though, and even if you do have savings you may not have easy access to them. So, in some situations borrowing money may be necessary, or a preferable solution.
Ask for help from friends or family
If you need pay for an emergency expense, see if a friend or family member could help. Perhaps they could cover the cost and you can pay them back later or they could loan you the money you need? Friends or family won’t usually charge you interest, so can be a cheaper way to cover a cost in an emergency.
Look into an alternative short-term loan
There are loans out there that offer quick access to money, without having to repay it in full in a matter of days or weeks. For example, if you choose Sunny, you can take on a loan of £1000 or less and repay it in installments that are affordable for you, over a six month period. Although you will, of course, be charged interest on your loan, you won’t pay any other fees – not even late repayment charges. This can help avoid any financial difficulties later when it comes to repaying what you owe.
How long do payday loans stay on your credit report?
A payday loan, as with all kinds of credit, will be listed on your credit report while you are making payments, and once it is paid off in full and the account is closed, then it will be listed as such. Lenders you apply to borrow from in the future will be able to see the record of the loan. If you miss any payments, make them late, commit to an alternative repayment plan with your lender or default on the account, these activities will also be reflected on your credit report and can stay listed for up to six years.
Do payday loans build credit?
A payday loan repaid in full will be recorded as such on your credit report and contributes towards the overall impression you give to lenders you may apply to in the future. Generally, if you can demonstrate that you’ve had credit and you’ve repaid it in full and on time, this will be considered a good thing by lenders you apply to.
However, in some cases, with mortgage lenders for example, seeing evidence that you’ve used payday loans in the past can cause you to be automatically ruled out, even if you repay your loan in full and according to your agreed repayment plan.
If you want to know how a particular lender would view your use of payday loans, you should speak to them and make sure you understand the impact of choosing to borrow with a payday lender before you make any decisions.
Payday loans should always be reserved as a last resort, used when you’ve exhausted all other options, and not taken out as a means of building your credit profile and history. If your primary goal is to improve or rebuild your credit score and your need for cash isn’t urgent, then there are a number of ways to do this, including dedicated “credit builder” loans available to help you.
Are payday loans regulated?
In January 2015, the Financial Conduct Authority (FCA) introduced a set of new rules to regulate the high-cost short-term credit sector, often referred to as payday loans. Lenders can charge a maximum of 0.8% interest per day and late payment charges are capped at £15.
The FCA also imposed a cap on the total cost of credit, meaning that if you borrow from a payday lender, you will never pay back more than double the amount borrowed, including interest and fees.
At Sunny, we welcomed these new rules. One of the great things that makes us different to some other short-term lenders is that we don’t charge fees for late payments or anything else. In fact, we never have.
Rather, we allow you to repay early if you are able to, and welcome this as it means you’ll pay back less interest overall. If you fall behind on your payments, we will work with you to help you get back on track.
What is the payday loans trap?
You may have read about this on sites such as the Money Advice Service. It’s definitely something to be aware of before applying for a payday loan. The payday loan trap is the term used to describe the process of repeatedly borrowing from payday lenders, borrowing from one to pay another, creating a circle of borrowing that essentially rolls the original loan from month to month.
Borrowing in this way can quickly become unsustainable. As each lender you borrow from will add interest, the amount you owe can quickly mount up and become unmanageable. If you ever miss a payment or make it late, you could also be subject to late payment fees, exacerbating the situation.
It’s worth noting that with Sunny, you can pay off your short-term loan over six months. This lets you deal with an emergency at the same speed a payday loan offers but without the danger of falling into the trap.
Looking for a speedy loan?
Now that you understand what is involved when it comes to a payday loan, perhaps a short-term loan might be the better option? If so, hit the apply now button below and you could receive cash in just 15 minutes, if approved.
Looking for further information on lending options?
Want to know more about borrowing money and what to think about when it comes to taking on a short-term loan? Take a look at our other guides below.