There is quite a lot of confusion around guaranteed payday loans and how they work, especially in the area of the interest rates that are charged. If you need a short term loan, then payday finance is often the best option. This article will explain why this is so, and why the interest rates shouldn't be a problem.
How Payday Loans Work
The way that a payday loan works is that you make the application online, and you'll be asked some questions about how much money you make in a month. As long as you do make enough to be able to cover the loan, including the interest that has to be paid, from one month's salary then you should be approved.
After you've been approved it should only take a few hours, or even minutes, before the money appears in your bank account. So with financial emergencies when you need some money fast, a payday loan can be extremely useful. You just have to pay it back the following month when you're paid.
Interest Rates of Payday Loans
Sometimes people are going to be put off from even considering a pay day loan because they think that the interest rates are extortionately high. And of course it is easy to get that idea from looking at the APR, which certainly is high. However the APR is not a good measure of a payday loan.
It's not a good idea to take an opinion on guaranteed payday loans based on the level of the APR because all this is telling you is how much interest you would have to pay if the loan was not repaid for a year. And of course you are supposed to repay it in a month, so the APR rate is not going to be anywhere near what you are actually charged.
In order to show just how much of a problem it is to judge payday finance on the basis of APRs, we'll look at the equivalent situation with a long term loan. It's like taking out a loan for three years, but only looking at the interest rate that would be charged in 36 years to judge how expensive it is.
Clearly that would be ridiculous, but that is exactly the same as what the APR is telling you with a payday loan. It's the interest rate that would be charged if it took you 12 times longer than it is supposed to in order to repay the loan.
When you actually look at how much interest you are being charged if you pay back the loan on time, you will usually find that it is going to be about the same as if you were taking out a long term loan. So in reality the interest rates on these short term loans are no higher than you get with a long term loan, it's just a different time frame.
The Alternatives
Even so though, it's a good idea to consider if there is a cheaper alternative to guaranteed payday loans available. In terms of a short term loan, the only other option you are going to have is to go in to overdraft on your bank account.
It really depends on the sort of overdraft that is being considered as to whether it's going to be better than a payday loan though. If it's been arranged then that certainly should be the cheaper option. On the other hand if it's unauthorised then it is usually going to be much more expensive.
Although it's not a good idea to judge short term loans on the basis of the APR, if you are comparing two different short term loans then the APR can be used as a reasonable form of comparison. So with a payday loan the APR is probably going to have four figures. With an unauthorised overdraft though, the APR is often calculated as having eight figures, meaning that it is in the tens of millions of percentage points. In that case, the cheaper option is very clear.
How Payday Loans Work
The way that a payday loan works is that you make the application online, and you'll be asked some questions about how much money you make in a month. As long as you do make enough to be able to cover the loan, including the interest that has to be paid, from one month's salary then you should be approved.
After you've been approved it should only take a few hours, or even minutes, before the money appears in your bank account. So with financial emergencies when you need some money fast, a payday loan can be extremely useful. You just have to pay it back the following month when you're paid.
Interest Rates of Payday Loans
Sometimes people are going to be put off from even considering a pay day loan because they think that the interest rates are extortionately high. And of course it is easy to get that idea from looking at the APR, which certainly is high. However the APR is not a good measure of a payday loan.
It's not a good idea to take an opinion on guaranteed payday loans based on the level of the APR because all this is telling you is how much interest you would have to pay if the loan was not repaid for a year. And of course you are supposed to repay it in a month, so the APR rate is not going to be anywhere near what you are actually charged.
In order to show just how much of a problem it is to judge payday finance on the basis of APRs, we'll look at the equivalent situation with a long term loan. It's like taking out a loan for three years, but only looking at the interest rate that would be charged in 36 years to judge how expensive it is.
Clearly that would be ridiculous, but that is exactly the same as what the APR is telling you with a payday loan. It's the interest rate that would be charged if it took you 12 times longer than it is supposed to in order to repay the loan.
When you actually look at how much interest you are being charged if you pay back the loan on time, you will usually find that it is going to be about the same as if you were taking out a long term loan. So in reality the interest rates on these short term loans are no higher than you get with a long term loan, it's just a different time frame.
The Alternatives
Even so though, it's a good idea to consider if there is a cheaper alternative to guaranteed payday loans available. In terms of a short term loan, the only other option you are going to have is to go in to overdraft on your bank account.
It really depends on the sort of overdraft that is being considered as to whether it's going to be better than a payday loan though. If it's been arranged then that certainly should be the cheaper option. On the other hand if it's unauthorised then it is usually going to be much more expensive.
Although it's not a good idea to judge short term loans on the basis of the APR, if you are comparing two different short term loans then the APR can be used as a reasonable form of comparison. So with a payday loan the APR is probably going to have four figures. With an unauthorised overdraft though, the APR is often calculated as having eight figures, meaning that it is in the tens of millions of percentage points. In that case, the cheaper option is very clear.
About the Author:
If you happen to be interested in acquiring a short term loan, or instead you just want to learn a bit more about it, visit Guaranteed Payday Loans which is where Frederick Hall, also writes on occasion.
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