What is a Payday Loan?

monopoly board collecting salary

Will you be able to pay back your payday loan on salary day? (photo by Mark Strozier CC-BY)

Payday Loan is the name given to a short-term loan or cash advance which as its name suggests is only required until the borrower’s next payday when it can be paid back. A tide-you-over loan is often seen as a quick answer to a temporary shortage of money, but it is not designed as a long-term borrowing solution to help your financial situation. Nor is it a cheap way to borrow money, indeed it can work out to be very expensive.

In the United States it is also known as Payday Lending.

The period of term varies but is often set at 31 days which is the normal period for those on monthly salaries. Most times you do not have to disclose why you need the money nor is there any restriction on how you spend the money.

Lenders require you to be in receipt of a regular income with a bank account and debit card, and sometimes a cheque book. You do not have to be a homeowner, they will accept tenants. You can also be self-employed. The website of the payday loan company will supply full details of the terms of loan and a list of the copies of documents you have to send to them. This often is a proof of address, bank statements, signature, and copy of your debit card.

Once accepted, repayment is made by a post-dated cheque or authority to transfer the amount from your bank account.

The amount you can borrow is relatively small between £100 and £1000. The interest rate for a loan is very high. For instance a quick look a some payday loams available today show an APR of 1286.1%. That means borrow £300 pay back £375. Most are set at a fixed fee. Some other companies are far, far, more expensive. Sometimes the loan can be extended beyond the month but payment of the fee is required.

Consumer Focus, an executive non-Departmental Public Body of the Department for Business, Innovation & Skills (BIS), had recently published a report on the Payday Loan Market in the UK. They found that the number of people taking out a Payday Loan has increase fourfold since 2006. It is estimated that over 1.2 million people are now borrowing 1.2 billion pounds.

Consumer Focus is concerned about the number of roll-overs and multiple lending that individuals are taking out. A sign that the borrower has substantial financial problems and may need independent help and advice on debt management. They are also calling for banks and credit unions to offer similar short term loans which will be subject to greater regulations by the financial services authorities.

Their report in pdf: Keeping the plates spinning.

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