When considering the best payday or instalment loan for your needs, there are some key things to consider;
• Can you afford it?
• What is the interest rate?
• How long do you need it for, is it short term?
• What happens if you can’t afford to make repayments, what are the penalties?
The longer the loan period, the more interest you will pay back. Before you think about applying for a loan, think about how much you can reasonably afford to pay back each month. Write out a monthly budget, detailing all your income and outgoings, and you should be left with an approximation of what you can afford. Try to get a loan where repayments do not exceed this amount.
There are two types of interest you can pay, fixed rate and variable rate. Your repayments will usually be higher with a fixed interest rate, but your repayments will always be the same. Variable interest rates fluctuate with the overall interest rate, so you are a little at the mercy of what is going on in the financial world in general.
Once you know how long you will need the loan for, it makes it easier to decide what type of loan to opt for. A payday loan is meant for short term borrowing, for example, for up to a calendar month, or your next ‘payday’. Personal loans will have lower rates of interest and repayments can be spread over the longer term.
Consider what might happen if you can’t make repayments. It is best to understand from the get-go what the penalties and consequences would be if you were not able to make loan repayments for some reason. However, every reputable lender will carry out an appraisal of your credit score prior to lending you any money.
Payday loans vs personal loans
Typically, payday loans are very short term and tend to have high rates of interest. The average APR is above the average interest repayment on a personal loan. APR and representative APR can be confusing. The representative APR of 1270% that we have to display on our homepage is a legal requirement. But does it mean that borrowing from PiggyBank is over 75 times more expensive than a 17.9% Representative APR credit card or 194 times more expensive than a 6.9% loan? The answer is no. PiggyBank doesn’t charge 1000s of percent in interest, our interest is actually 0.80% per day. Making us one of the most cost effective short term lenders in the market. Short-term lenders are authorised by the Financial Conduct Authority and there are a minimum set of requirements that lenders must adhere to.
- an initial cost cap of 0.8% per day – interest and fees charged must not exceed 0.8% per day of the amount borrowed
- a £15 cap on default fees – if borrowers default, fees must not exceed £15. Firms can continue to charge interest after default but not above the initial rate; and
- a total cost cap of 100% – borrowers must never pay more in fees and interest than 100% of what they borrowed
If you consistently find that your wage slip falls short of your outgoings, it’s easy to become reliant on payday loans, and the high-interest rates will keep you in the red. If you fail to make repayments, the lender can default you and charges and interest can build up, meaning the loan will cost you more. The positive thing about payday loans is that they are flexible; the downside is that they are an expensive borrowing option.
Personal loans have lower rates of interest generally and are a good option if you wanted to consolidate your current debt into one manageable payment for example.
Personal loans can be used for a lot of things, as long as you are not using them to buy things that you can’t afford.
Having to apply for a loan can be a stressful experience, and you may feel like you are putting your financial freedom in the hands of someone else. But you just need to work with your chosen lender to get the right deal. Above all, choose a deal that is repayable and sensible for you, not just because a seller is trying to earn commission on their product.