In the last 12 months according to the Financial Conduct Authority, nearly five-and-a-half-million Brits took out payday loans or instalment loans. Although payday loans and instalment loans constitute just 0.1% of the credit market, their rise in popularity in recent years, especially after tough new laws were passed to protect borrowers, shows that they’re now a permanent part of the UK credit landscape and that they’re here to stay.
Payday loans and short term loans bear many similarities – they’re both taken out by borrowers to cover, in general, emergency situations so the amount of money borrowed isn’t that high. Most payday loan providers and short term loan providers are happy to work with borrowers whose credit history is not perfect – for example, if a borrower has two or three missed payments a while back, then that’s normally OK.
In this article, the Loan Princess team looks at:
• what a payday loan is
• what an instalment loan is
• whether a payday loan or an instalment loan would be better for you, and
• how applying for a payday loan or an instalment loan through a broker like Loan Princess benefits you
What is an online payday loan in the UK?
Payday loans tend to be made for a figure between £50 and £1,000. Larger loans only tend to be approved by lenders if you have a good track record with them already so, in actuality, the limit for first-time borrowers with a particular lender may be around £400 to £500. Remember though that every lender is different so it’s always worth asking the question.
Payday loans are, in most cases, taken out by borrowers with poor or limited credit histories for whom a bank overdraft extension or an extension on their credit cards limited would not be granted. Payday loans are also taken out by borrowers with smaller incomes and the lenders who occupy this sector are accustomed to working around their borrowers’ sometimes tight financial situations.
The interest rates charged on payday loans are generally quite high when compared to the type of finance you receive from your bank or your credit card companies.
However, because most payday loans are not made for more than 35 days after the money has been received by a borrower, the interest does not get much chance to build up to a particularly large amount. What that means is that, with a payday loan, whatever you borrow must be paid back in full plus the interest within 35 days. With a payday loan, there is only ever one repayment, unlike with instalment loans.
For example, under the guidelines laid down by the Financial Conduct Authority, the watchdog which oversees both the payday loan and instalment loan market, borrowers like you can not be charged more than 80 per day for every £100 you borrow, you would only be charged £16 interest on a £200 payday loan you take out for 10 days. Read about alternatives to Payday Loans here.
What is an instalment loan?
An instalment loan is different from a payday loan. With an instalment loan, you make more than one repayment and your loan is taken out for more than 35 days. Instalment loans can be for a term lasting up to one year meaning that a 6-month loan and a 12-month loan is possible.
Most instalment loans, according to the Financial Conduct Authority, are taken out for a period of 3 months meaning that, once you receive the money from your lender, you make the first repayment on the first month anniversary of receiving the money, the second repayment on the second month anniversary of receiving the money, and the final repayment on the third month anniversary of receiving the money. In most cases, the amount of money you repay on each date is the same however please be aware that some lenders will charge you more on the first payment with subsequent repayments going down in size.
Instalment loans are normally taken out by borrowers for large amounts than payday loans – sums between £250 and £2,500 are a lot more common. The amount of money you pay back every month is cheaper than making the one-off big payment you’d make with a payday loan, however, because there are multiple repayments, the amount of interest you pay overall is higher.
Is a payday loan or an instalment loan better for you?
That depends on you and your personal circumstances. Let’s say that you wanted to borrow £500 on a payday loan at the maximum amount chargeable by the Financial Conduct Authority over 30 days. At 80p interest per day for every £100 borrowed, you’d pay back £120 in interest. In other words, 30 days after taking the loan out, you’d have to make sure that your lender could collect £620 from your account (that’s the original £500 plus £120 interest).
If you took that money out over 3 months or 90 days, you’d pay 3 lots of £120 per month interest on the £500 meaning that the total amount that you’d pay back to your lender would be £860 – that’s £240 more than with the payday loan. However, if you worked with a lender who allowed you to pay back the £860 in three instalments, you’d pay back £280 per month for 3 months.
It’s always better if you can pay back a loan as quickly as possible. However, many financial experts may argue that it’s more important to make sure that you’re able to meet your repayments so that your credit score is not affected in the longer-run.
Apply for a payday loan or an instalment loan through Loan Princess
Loan Princess works with a wide panel of FCA-approved lenders happy to work with applicants with less than perfect credit histories looking to take out a payday loan or a short-term loan.
We don’t lend you the money ourselves. What we do is we match you with the lender or lenders most likely to work with you based upon the information you give us on your application form. Once you’ve sent us your details, we’re normally able to give you an indication within a few seconds on whether you’ve been accepted and on the rates our lending partners are offering you.
Our service is free of charge and you’re under no obligation to accept any offer we provide you with. To start your journey with us, please click here.