Payday loansoffer a small amount of moneyfor a short term. Though itoriginally started off in the United States, payday loans have been penetrating the markets of the United Kingdom since the last five years at a fast pace. In UK, payday loansare usually money lentup to £500that is repaid within a short span of time or on the next payday. Usually a payday loan in UK per month costs around £25 for every £100 that is borrowed.
Payday loans are essentially loans:
i.For small amounts
ii.Those are due in the next payday
iii.That requires the borrower to give access to the checking account or provide the lenders with an assurance check of the full borrowed amount
Payday loan regulations laid down by the UK Government
As per the Consumer Credit Act 1974, in order to offer credit, loan lenders must have avalidlicence issued by the UK Office of Fair Trading (OFT).
With respect to interest rates levied by the lenders on the payday loans, there are no restrictions at present. However, the UK government is making a new legislation to cap the maximum costs of payday loans.
The Advertising Standards Authority (ASA) regulates the advertising of payday loans. Hence, in cases where it receives complaints, the ASA can take action against the payday lenders.
Currently the Financial Conduct Authorityis the agency that controls the financial firms.
Comparison between credit cards, bank loans andpayday loans
The tenure of repayment is short.
Amount borrowed is smallto medium.
You can use credit cards to make purchases such as a vehicle, pay bills or to travel.
The annual percentage rate (APR) charged on credit cards can vary anywhere between 0% and 40% based on the credit score.
Only persons with a decent credit score are eligible for credit cards
Repayment terms while using a credit card is little flexible as there is a period of 56 days that is interest-free as long as you settle the total bill.
Credit cards offer better protection of the money invested while making big purchases as even the credit card company is equally held responsible to refund the amountlost in a bad sale
The tenureof the loanis medium or long-term.
The loan amount is huge,normally in the range of £1,000 to£100,000.
These are the most common type of loansused as investments in businesses.
These loans can be usedto invest in fixed assets such as factory, machines, land, buildings or automobiles.
Therate of interest, the loan period and the repayment amount are fixed by the lending bank. The interest rate is of two types -fixedratei.e. a certain percentageischargedon the outstanding amount throughout the loan period or variableratei.e. the rate percentage varies according to the changes made on the base rate by the Bank of England.
Only persons with a good credit rating are eligible for bank loans.
The loan tenure is short-term.
Amount borrowed is small when compared to bank loans, usually around £50to£1,000.
Theseloans are most commonly used for personal expenses such as purchasing a vehicle, planning a vacation, paying hospital bills, utility bills or house rent orto avoid penalty fees levied from another source.
The annual percentage rate (APR) for a payday loan is high and the lender generally decides the rate of interest for payday loansand this variesfrom region to region.
Persons with even a poor credit score or no credit history can avail a payday loan.
Generally, online lenders, check-cashing stores and cash advance lenders are the ones who lend payday loans to borrowers.
Payday loan repayments have a long-term benefit as it improves the credit rating if you clear off the debts.
Based on the amount you require and purpose of the loan, you can choose which type of loan or financial help suits you best.