When determining the actual cost of payday loans, it is worth noting that it is quite misleading to use APR within the range of actual cost comparison of payday loans with traditional and other forms of short term loans. We have to remember that payday loans are unique as such bridge financing are made for a shorter period of time compared to the other types of loans. And while APRs of payday loans are well within the 3-digit range, these ‘sky-high’ rates have limited bearing on the actual cost of the payday loans.

Taking a Short Term Perspective

The principle behind this process can be compared to a hypothetical example where a taxi quotes a price of £15,000 for every 1,000 miles travelled or a hefty sum of £50,000 for a ton of tuna. Of course, we are well aware that no sane person will actually choose to travel a distance of 1,000 miles in a taxi or buy that many tuna. Taxis are specifically intended for short distance travelling and you will only buy a few pounds of tuna. In the same breath, you only use payday loans to address short term cash flow problems and this would normally last for a month.

It is also important to point out the fact that banks and other lending entities compete for a bigger share of the market and offer premium rates to get ahead of competition. In addition to this, we must remember that payday loans are relatively more expensive than traditional loans but can actually be the cheaper alternative in absolute terms.

A short term perspective is especially important should you be out of work and looking for loans on benefits because your income is restricted and you don’t want to get any late payment penalties which may send you repayments spiralling upward.

Breaking Down the Cost of Payday Loans

The fees levied on payday loans are used to cover the cost associated with the processing and verification of loan applications, capital cost and overhead expense. The key difference is that such cost is spread over a larger business portfolio for companies that specialise in larger loan packages, while payday lending companies draw such operating funds from their margin on loans with smaller amounts. This explains why banks and other entities that provide traditional loans charge lower annual interest than a number of payday lending companies.

Payday lending companies also have greater risk than banks and other companies that specialise in traditional loans. In most cases, short term loans have higher default rates and this means an escalation in the risk premium of such loans, which ultimately increases the cost of such loans. Thus, we have a situation where the interest rates of payday loans and such other types of short term loans are inevitably higher. Providers of short term loans are forced to find a way to recoup their investment and maintain a fair margin for the service they provide to remain viable.

Because of its expensive nature, payday loans and other forms of short term loans should never be tapped as a main financial option. It is a short term cash solution and the decision on whether one gets a payday loan or not should be made by weighing the flexibility of having a reliable source of instant cash against the cost of such loan. You must always decide on the cost or foregone benefits that you may incur in the event you decide against getting a payday loan for a short period of time.

Living on benefits is never easy. Planning your life around the schedule of your benefit payments is inconvenient at the best of the times. Often it’s completely impossible.

It’s a fact of life that, inevitably, we all meet with unexpected expenses from time to time. If this happens in-between your benefit payments things can get a little too close for comfort.

One of the most effective ways to fashion yourself some breathing room is by taking out a short term loan. However, there are a number of things to consider first.

Interest Rates

You will find it practically impossible, especially in today’s financial climate, to get a loan from a major bank. If you are considering getting a loan whilst on benefits then, unfortunately, you will have forget about the interest rates you have seen advertised on the high street.

The lenders you are more likely to secure a loan from operate in what is known as the “sub-prime” market. Whilst you may be used to hearing of interest rates between around 10%-20%, the typical APR on a loan form a sub-prime lender will be somewhere from 500%-4,000%. Some are in the tens of thousands.

For this reason it is best to borrow on small amounts for very small periods of time, otherwise the amount owed will rise rapidly and you may risk defaulting your repayments. This will impact on your credit rating.

Loan Amounts and Guarantors

If you are unemployed the absolute largest amount you are likely to secure a loan for is £3,000, however, only very few lenders offer this much to people who are on social security. Their interest rates are very high and their collection policies are inflexible, meaning if you are unable to keep up with repayments, which realistically, considering the APR, is likely, you’ll be facing all sorts of trouble. Event then, these lenders will only lend an amount such as £3,000 if you have a guarantor.

A guarantor is somebody who is willing to make your repayments for you should you fail to do so. It can be anybody but it is normally a close friend or family member. Being a guarantor is a big commitment as they are making themselves legally liable to pay off the loan if you can’t and as such guarantor loans need to be thought about carefully.

Furthermore, they will need to have a job with a decent income and a good credit history, as they will be credit checked by the lender. This means they can’t have received a CCJ or defaulted a payment in the last six years, or be on an IVA or be bankrupt.

If you are lucky enough to have someone willing to stand as a guarantor for you, it’s worth figuring out between you if it would not be wiser for the guarantor to get a loan in their name and then lend to you as a friend. This is also a big commitment but may ultimately be cheaper and there are typically more lenders for people with good credit then there are guarantor loan lenders.

For one thing, with their good credit history and income, they should be able to go to a high street lender and get a loan with a considerably lower APR. Secondly, high street lenders can be easier to negotiate with if you run into any troubles and so will your friend/relative.

If you don’t have a guarantor, which most people don’t, you’ll find it hard to get more than £1,000.

Credit Checks and Credit History

Your credit history is also going to be a factor. If you receive a County Court Judgement (a court order to pay an outstanding bill or debt) or receive a default notice (a letter from a company which comes after a final warning to tell you that you’ve defaulted, or failed, to pay outstanding monies) both of these will stay on your credit history for up to six years, limiting the amount you can borrow and the types of lender you can approach.

There are a number of websites that you can go to in order to find out exactly what your credit score is and what is on your credit history. You normally have to pay for this service, however, it is worth doing. Many people who have received default notices don’t know about it, often losing the actual notice itself amongst other bills and documents.

Some short term lenders may not credit check you at all, but be honest with yourself. Will you actually make repayments on time? If not, don’t get the loan. These same short term loans are generally loaded with lots of extra fees and charges for failed and late payments. This is on top of the interest so be sure you can pay on time.

Secured Loans

A secured loan is where you, the borrower, have to provide collateral to the lender as a kind of deposit for the loan. One particularly common form of secured loan offered to people on benefits or with poor credit are loans secured against cars. This is good news if you have a car or some other form of capital, as it opens up the option of secured loans to you.

However, if you fail to keep up repayments you will lose your car. Losing capital is the last thing you need when you’re already in a tight spot, therefore you have to asses the risk you are taking very carefully.

In other instances you may be asked by a lender to pawn some of your possessions in order to get access to a loan. This is similar but less risky as you know where you stand and, generally, the possessions will be worth less than a car. Again the interest rates are very high, so there’s no point sacrificing your possessions if you can’t afford the repayments anyway. You’d be better of selling them for cash. The amount raised would be smaller but at least you’d avoid accruing interest or harming your credit rating.

• Borrowing From a Credit Union
• Standard Payday Loans
• Cheque Based Payday Loans
• Logbook Loans
• Pawnbrokers

It happens to the best of us and it is certainly nothing to be ashamed of but when you are facing a bit of a cash crisis, where should you turn to get the best deal on a short term loan?

In this article I am going to walk you through the 5 main options that you have open to you. I’ll try to give an honest overview of their various pros and cons and guide you to the option that best suits your needs. I’ll try to include relevant information on rates of interests, fees and charges and give representative examples of how much you will repay over the term of the loan.

So, let us begin.

Option 1 – Credit Unions

Credit unions are not-for-profit organisations that typically cater for savers and borrowers in a particular geographical location or profession. They are now starting to offer short term loans to their members as an alternative to the more expensive options detailed on this page.

Some will require you to already be a member and have some level of savings before they agree to a loan, while others will carry out some background checks before lending to ensure that you are able to repay what you borrow.

The rate that a credit union can charge on a loan is limited by law to 3% per month which works out at an APR of 42.6% but typically they will be just 1% per month (12.7% APR).

We would always recommend that you start you search for a short term loan at a credit union and you can find out where you nearest one is using the aptly named website Find Your Credit Union.

Option 2 – Payday Loans

As the most well know and the most widely advertised of the short term loan options, payday loans have become a common feature in society but the have not been without their scandal. There have been warnings from many bodies responsible for family finance advice, primarily because of the very high typical APRs applied to the product.

There is a good reason for this though – the purpose of such loans is usually to cover a very short period where an individual requires quick extra cash and the loan is typically unsecured. The name “payday” comes about because that is what most loans are for – to cover outgoings between now and the next payday of the individual.

So how much will you pay in interest?

Well it depends on the institution you borrow from but one of the market leaders, Wonga, have a representative APR (annual rate of interest) of 4214% but because you can only borrow the money for up to 30 days the actual monetary values look more reasonable.

At the time of writing, a £400 loan from Wonga for a period of 10 days will leave you with £445.49 to repay in total over the term which is 11.37% in interest.

I believe that looking at things this way actually makes payday loans look a bit more reasonable.

Short term payday loans are best for: people who require fairly small loans at very short notice as decisions can be instant (mostly online with no need to fax documents) and the money can be in your bank account in as little as 15 minutes.

Option 3 – Cheque Based Payday Loans

There are a few operators in this market which differs quite significantly from more traditional payday loans. With cheque based loans, the borrower is required to send a copy of a cheque guarantee card along with a few blank cheques that the loan company use as collateral should you fail to repay your loan in the period agreed upon.

The benefits of this type of service is that you generally benefit from much lower representative APRs meaning the overall cost of borrowing is less.

For example, at the time of writing, Mister Cheque offer a representative APR of just 295.74% which is a great deal cheaper than the Wonga example stated earlier.

Some companies also allow you to complete the process without any credit check which can be great for those with bad credit ratings or CCJs.

The cons are clear though, because you have to physically post documents to them, the cash is unlikely to hit your bank account for at least a day (assuming you post them first class). The extra effort required on your part is reflected in the lower rates though.

Cheque based payday loans are best for: those who can afford to wait a day or two for the cash to hit their bank account.

Option 4 – Logbook Loans

Security statement: a Log Book Loan is secured on your vehicle.

This type of credit is provided to those who have a car or other vehicle against which to secure it. Since this loan would be secured against your vehicle, if you fail to keep up the payments, you are at risk of having your vehicle seized and sold to repay the remainder of your loan.

The downsides of this type of loan are clear – you can lose your car.

The advantages of this type of loan are that you can get a larger loan in comparison to the previous 2 payday options (up to £50,000) and that, because the loan is secured, you do not have to undergo any credit checks.

A representative APR for a logbook loan is 478.30% which is by no means the lowest rate you can achieve but with repayment windows ranging anywhere from 1 day to 48 months, you can at least schedule the repayment for further in the future if you should wish.

Logbook loans are best for: people who require slightly more credit that a typical payday loan can provide and that have a car that they can, if the worst comes to the worst, managed without. For those people who are unemployed or who have bad credit, this option allows you to get a loan thanks to the security you are putting up.

If you use your vehicle for work purposes of consider it vital to everyday life, a logbook loan is probably not for you.

Option 5 – Pawnbrokers

The pawnbroking industry has been seen on our high streets for many years but in recent times it has gone online too. Now you can complete the whole process online if you should wish with companies such as Borro.com.

The principle of pawnbrokers is that you exchange your valuables in exchange for a loan with a valuation agreed upon by both parties. The valuables are then held as security against that loan in the case of non-payment on your behalf.

With online services, you can pawn items ranging from jewellery and watches to art and even cars. Any item of significant value may be considered as security by the pawnbrokers. The security means that no credit checks are required.

Services such as Borro.com tend to lend on a month-by-month basis with interest rates dependent on the loan. At the time of writing, Borro.com are offering a 6% monthly interest rates on loans up to £999 which is an APR equivalent of just 85% which is much lower than other services reviewed in this article.

So the obvious pros are that the interest rates charged tend to be much lower than other short term loan options and there are no credit checks.

The biggest con is that you have to give up possession of your valuables for the period of the loan. And if you are unable to repay the loan then you will lose those valuables. You are also are the mercy of the pawnbroker when it comes to the valuation of your valuables and you might not get realistic market value for them.

Another con is that the items have to be handed over before the loan reaches your bank account so it’s certainly not as fast as some of the other options displayed here.

Pawnbrokers are best for: people who have valuable items that they are willing to put up as security in return for better rates on the short term loans. As with logbook loans, because of the security you are putting up in the form of your valuables, people with bad credit histories, CCJs or who are unemployed are still likely to be accepted. Furthermore, loans for people on benefits are not out of the question either.

In Summary

If you want the lowest rates – speak to your local credit union

If you need cash fast – go for a traditional payday loan from Wonga.com

If you want relatively low rates and have something of value to use as collateral – pawnbrokers such as Borro.com are you best bet

If you want relatively low rates but can wait a day or two – a cheque based payday loan from Mister Cheque might be appropriate

If you want larger cash sums and have a vehicle to secure against – a Logbook Loan is the way to go