If you kept on finding yourself short of money each month, it was always best to talk to your high street bank. Not anymore. The credit crunch has restricted ordinary people's access to traditional lenders. Overdraft extensions, credit cards, personal loans; many are off limits to the masses. Rising living costs, the reluctance of banks to lend money and the continued demand for credit, has given rise to a new breed of lender: payday loans companies.
The tale of the tape: what is a payday loan?
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Quite simply, it's a small short-term cash advance on your wages or salary designed to cover your expenses till payday. These loans usually involve borrowing £50 - £750 - and getting the cash in your pocket within hours. A lender will advance money against your bank details and automatically recover it when your next payday arrives.
In the blue corner: 24-hour pay day loans.
Pay day loans great strength is that they give those people the banks have turned their backs on, the chance to get credit once more. They're also one of the quickest ways to borrow money. That's why UK payday loan applications have risen 55% this year alone. And why nearly 10million borrowers in the USA have been benefiting from easy pay day loans for decades.
UK pay day loans companies freely admit there are less expensive ways to borrow money. Even cheap loans have high Annual Percentage Rates (APR). However, we're talking about a short-term loan here - so an APR doesn't give the clearest of indications how much payday money really costs. A far simpler way to work out the charge is thus: borrow £100 with a UK payday loan company and you'll repay around £125. And this compares favourably with many credit cards - and is certainly cheaper than exceeding an overdraft limit.
Payday loans require no credit check.
Of course, this has its benefits and its pitfalls. That's why lenders make the true cost of borrowing clear at application stage. Just as they clearly assess a borrower's ability to repay. That's why the British Cheque Cashers' Association receives next to no complaints from the public about payday loans.
The more often you take out a pay day loan, the less expensive they become. Some lenders offer as much as a 15% discount for repeat borrowers. Most companies won't charge an administration fee either. The best place to find how free payday loans deals compare with those offered by high street banks is online.
In the red corner: bank loans.
Bank loans have been around for a long time. They usually involve borrowing much larger amounts from so-called reputable lenders at lower APR's. Well they used to! Unfortunately, our old friend the bank loan's reputation is somewhat in tatters these days. If the commentators are to be believed, it's the banks' irresponsible lending that's sent our economy spiraling into recession.
The verdict.
When it comes to borrowing large amounts at a low APR, pay day loans cannot beat a bank loan. However, the banks have been well and truly knocked off their position as the most reputable lenders in the UK.
Here's the rub; the fight between the two is a total mismatch. The banks are not lending to a large proportion of their customers. So, this referee's ending the contest right now.
As long as you're aware of how much the loan will cost you in the end and can afford to make the repayments, then a cheap loan will give you the benefits of credit. So, if you've got a big night out planned but a pocket full of small change, you don't have to be party-pooper anymore. If an unexpected bill lands on your doormat and it needs paying pronto, then a cash advance in the form a of an affordable loan could be in your pocket within 24-hours!
It's simple, if you have a full-time job and you need £50 - £750 fast and your bank says no, then a pay day loan could be for you. They're simple products designed to help people with a short-term cash-flow problem.
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