Critics point to the ease with which these loans can be procured for almost anything, including funding a night’s worth of partying. More common, however, are short-term, unsecured loans for plastic surgery. These procedures can range from liposuction and tummy tucks to facelifts and breast enhancements. There are no checks and balances for the people to whom these forms of credit are being given. When the borrowers are unable to make payments either on time or at all, they are met with aggressive handling and techniques that only drive them further into debt. The interest rates on these loans are much higher than typical loans, with the highest topping 3,000 percent. Since these loans are unsecured by any kind of collateral, the collection companies are mostly unable to seize anything to recoup their losses. This unevenness in the economic structure further quashes any hope the economy has of finding and maintaining a strong basis.

This situation has not gone unnoticed by the government, however. Efforts are being made by the Office of Fair Trading to bring to justice those unscrupulous companies violating the Consumer Credit Act. The OFT is already strengthening regulations and investigating the biggest payday lenders in the United Kingdom. Any company found in violation of the Consumer Credit Act can potentially have its license revoked to lend money, effectively crippling its operations.

Definition

A payday loan basically a small loan that generally ranges between £100 and £1,000. It is an unsecured loan, meaning the borrower does not need to provide any property as collateral. The money borrowed is to be repaid on the next payday, or at latest the payday after that. This is where the appellation “payday loan” comes from.

Interest Rate

The interest is much higher than that of traditional loans because of the short term of the loan and the risk involved to the lender. However, it is still much lower compared to unauthorised overdrafts and late charges or fees incurred when using other fast cash sources such as credit cards.

For instance, a payday loan of £100 has an interest of 25%. The borrower thus has to repay £125. Some unauthorised overdraft charges amount to 22% every five business days. This means that in this case, the borrower has to pay the bank £188. Further, credit card late payment or utility reconnection involves similar costs to those of a payday loan.

Processing

Prior to the internet, a person would go to the offices of a payday loan lender to make an application. They were required to provide proof that they were a resident of the country and were at least 18 years old. Most people furnished copies of their driving licenses or their passport. Also required was proof of employment and salary in the form of a copy of the pay slip. The borrower was also asked to provide a bank statement that showed at least two months of activity.

The borrower would then write a post-dated cheque, which the lender would redeem if the borrower defaulted on the loan. If the money in the bank was insufficient, the borrower would be facing bounced-cheque charges on top of the interest and late fees if any. This was, and still is in some institutions, how the loan was secured in lieu of collateral.

Today, the internet has made fast loans even faster. Getting a payday loan is now a matter of logging into the loan provider’s website, filling out the application, and faxing over the necessary documents. If approved, the money is deposited the next working day in the bank account furnished by the borrower. This makes it easier to obtain cash needed during emergencies.

Studies and Statistics

Due to various controversies surrounding this loan type, studies have been done to check its impact on the people it is designed to serve. Researchers at the University of Chicago’s Booth School of Business have found that places hit by natural disasters benefited from the availability of fast loans. Areas where this type of lending was not present had more difficulty coping with the crisis. Other studies, such as the one carried out at Clemson University, have proven that there is no relationship between bankruptcy filing and payday loans.

In Conclusion

The payday loan is a viable method of obtaining fast cash to meet one’s necessities especially during emergencies or crises. Its interest rate is comparable or even lower than equivalent mainstream fast loan emergency services. The brevity of its processing time makes it ideal in the area of need it was designed to address.

All borrowers who want to receive one of these fast loans must apply for it. Borrowers must understand that when they borrow money from a lender, they will be paying an interest rate along with the loan. Paying an application fee seems like an unnecessary additional cost, especially since the time period for fast loans is so short. Therefore, most payday loan lenders waive application fees, and it’s free to apply.

On the other hand, borrowers must be advised that some payday loan companies use broker networks, also known as loan finder service companies. Payday loan brokers, which can be companies or individuals, serve as mediators between borrowers and payday loan lenders. A broker’s responsibilities include passing application information to a group of lenders, helping the loan lender eliminate client acquisition expenses, and reducing advertising costs.

If the loan company uses a broker network, then there will be a broker fee. The borrower will pay the applicable fee on the advertised loan. This may not be true with all payday loans, but borrowers must be aware that these fees do exist. The Office of Fair Trading has asked the UK government to impose tighter restrictions in this regard though, thus removing broker fees from most payday loan lenders.

Many online payday loan lenders advertise a quick application and short turnaround time for receiving the loan. The application cost, if any, is seldom advertised. For this reason, borrowers are encouraged to research about lenders to discover whether they use a broker fee or not. Doing so helps eliminate confusion and reduces surprise costs, hidden fees, and unexpected rates.

When the borrower does have to pay an application cost, he or she should take that fee into account along with the loan’s interest rate. It helps for the borrower to set up a comparison chart between prospective lenders. Comparing loan terms from different lenders will help the borrower avoid application costs. As long as the lender does not use broker fees, frequent payday loan borrowers can expect to save a lot of money bypassing application fees.

It is ultimately up to the borrower whether he or she chooses a payday loan lender that has application costs. Being aware that broker fees do exist and that some lenders in the UK do use broker networks is a key piece of information borrowers should take into consideration when applying for payday loans.

The big difference between a payday loan and a personal loan is that payday loans are fast loans that are usually approved right away. Other benefits of a payday loan is that a borrower is not required to have good credit — they only need to have a job, a bank account and a regular paycheque. This is one of the main differences between a payday loan and a personal loan. Also, since a payday loans are fast loans, a payday loan puts cash in hand immediately after the paperwork is signed. Another very useful aspect of a payday loan is that no collateral is required; instead the lender uses their job as guarantee of repayment. Borrowers must thus provide proof of address, pay slips and bank account details.

Personal loans differ in a number of ways. For example, personal loans require physical collateral. Common types of acceptable collateral are high-ticket items such as a car or a house. Before the lender releases the funds for the loan, they place a lien on the borrower’s collateral. This way, the lender can hold the collateral until the loan is paid. Lenders would generally not consider approving a personal loan without collateral. As mentioned previously, something else a borrower must keep in mind with a personal loan is their credit rating, if a borrower has a bad credit rating, they will find it much more difficult to obtain a personal loan.

The one exception would be in the event that a borrower’s collateral was worth more than the amount of the loan. In the event a borrower does not repay a personal loan, the lender can place a lien on the collateral instead of losing any money. This is why it is always very important to make sure the loan agreement is read thoroughly, as in some cases a lender can legally take possession of the borrower’s personal property if it is stipulated in the loan agreement.

Another disadvantage to a personal loan is that it can take longer to be approved due to the burden of paperwork required to process the loan. The end result is that a borrower has to wait up to a month before the loan is approved. In addition, lenders who offer personal loans are more inclined to charge an interest rate, whereas a payday loan charges a flat fee based on the amount of money borrowed.

In some cases a payday loan has a significant advantage over personal loans, mostly because a payday loan is quicker, easier and more convenient to obtain.

Sometimes fast cash is the best solution for urgent situations. Many people in the UK are struggling to make ends meet in today’s economy. Taking out a payday loan can help keep hardworking people on track with their monthly bill payments and other expenses.

The Increasing Popularity of Payday Loans in the United Kingdom

Of late, the United Kingdom has seen a boom in the number of borrowers for fast loans. For a small fee, usually calculated per pound borrowed, borrowers can receive a fast loan right away and then repay the money within a few weeks, traditionally on his or her next payday.

The growing popularity of payday loans is largely because of its simple application process. Borrowers can take out a fast loan up front, and they can do it in the comfort of their own homes. These loans are available online, which saves borrowers the trouble of going out and applying in person at brick-and-mortar loan company offices.

How to Apply for a Payday Loan

The application process for an online payday loan is rather simple. It requires the borrower to e-mail or fax his or her application as well as any required documentation such as proof of employment or income to the loan company. Information such as the purpose of a loan is usually not required.

Application Verification and Loan Repayment

The loan company verifies the information received by the borrower and then transfers the loan electronically to the borrower’s account via direct deposit, which can happen within hours. In doing so, the borrower’s next payday is determined and set as the agreed upon maturity date. The company will then withdraw the loan repayment and any fees on that date, thus completing the previously agreed upon transaction.

If the borrower’s account does not have the sufficient funds to repay the loan and any acquired fees, the loan company may increase the interest rate or add additional fees.

The Benefits of Payday Loans

Perhaps the biggest advantage of using this type of loan is that they are always available in times of emergency. Unpredictable events such as an unexpected hospital visit or a sudden need for car repairs can put people in tight positions in need of money fast. In these situations, quick loans offer people a short-term solution to hold them over until their next paycheque.

There is no shame in asking for help now and then by applying for a loan. In fact, more and more Brits are now seeing the benefits of taking out fast loans.

First, the amounts contained in a normal and customary paycheque will impact a potential loan. In order to process fast loans, a prospective lender or bursar must obtain certain qualifying information about a borrower. A potential banker or lender must review one’s work history and paycheque history. This will allow the lender to determine what the total capacity may be to pay back the principal and the interest on any loan given. It will also provide a glimpse into how often one is paid, so that a schedule of payments can be developed for the loan’s eventual repayment.

Second, additional debts and expenses the applicant is responsible for may affect the interest rate. A borrower will also need to list other monthly expenses to provide justification for the amount of the loan being considered. A bursar must determine if the borrower in question will have the resources after payday to be able to pay back his loans. If there are significant other expenses, the lender may increase the interest rate in order to compensate for the risk of lending to a questionable borrower in the first place. A lender may even decide to calculate the interest rate on a variable basis, instead of sticking with a fixed rate on the loan. If the loan’s total period exceeds one or two pay cycles, the lender may choose to recalculate the applicable rate in their favour in order to account for the additional time that the borrower is using the proceeds of the loan.

One benefit of obtaining a fast loan is that one’s credit background will not play a role in determining the interest rate. In fact, the credit rating will play almost no role in your application. Most traditional loans will require an applicant to have a fairly decent payment history. However, for a payday loan, the credit history may not play a very important role, which is good, since someone applying for such a loan may not have good credit standing.

Payday loans, however, provide speed the way a traditional loan cannot. The application and disbursement of such funds can happen quickly, and the borrower can then use the funds to resolve an emergency situation. Such speed is generally not possible with more traditional loan vehicles.

Proof of Employment and Salary

The most important requirement is proof of employment and salary. All lending companies need some form of assurance that the borrower is capable of paying off the loan, even companies that do not do credit checks or those that provide loans to people with bad credit. Those in the payday loans business use the proof of employment and the proof of salary to determine ability to pay. Some companies require a minimum monthly salary, say a third of the maximum amount that may be borrowed, before they approve a payday loan.

Bank Accounts and Bank Statements

These are used as additional proof of a person’s ability to pay. Most fast loan lending companies ask for statements that show that the account has been in use for at least two months. The bank account indicated is also where the lenders will deposit the money being borrowed.

Proof of Identity and Residence

The applicant should be a resident of the United Kingdom and be able to provide proof of such in the form of a driving license or passport. This is also used to ensure that the borrower is the person indicated in the proof of employment, and to serve as a sample of the borrower’s specimen signature. In the event that the borrower defaults on the loan and fails to pay it off, the lender will also have enough documentation to initiate court claims.

The Minimum Age Requirement

According to law, not just anybody can take out these fast loans. In fact, any company that sends material encouraging a person below the age of 18 to take out a loan is committing a criminal offence. Furthermore, although the law allows those between the ages of 14 and 18 to apply for a loan, it requires that an adult act as a guarantor.

Most lending companies, as a matter of principle, do not take borrowers below the age of 18 to court. People below this age are not generally held responsible for the contracts they enter into. Thus the majority of lenders set the minimum age requirement for their applicants at 18.

Expedited Processing

There are forms to fill out and in most cases there are also documents to submit to the lender. The application is then processed and evaluated. Traditional loans require a lot of paperwork and considerable processing time in order to determine the applicant’s eligibility. The large amount of money being lent leads the lender to carry out a credit check and to carefully assess the borrower’s capacity to pay.

Payday loans, on the other hand, are designed to meet the borrower’s immediate financial needs, so the process is much shorter — generally a day or two. Most of the time, any delay in the process is caused by the time it takes the borrower to fax over the few documents being requested. Companies providing these fast loans often go a step further in shortening the process by foregoing the faxing part and by using the data found in the client’s completed online loan application form.

The Amount Borrowed

The first main difference is the amount being borrowed. Traditional loans like mortgage loans involve large sums of money. Their main purpose is for use in the purchase of expensive necessities like houses and cars. They might also be used as capital for a business venture.

On the other hand, payday loans involve much smaller amounts. These usually range between 100 and 1,000. Because these amounts are small, borrowers use such loans to purchase daily necessities or as funds to help them through emergencies where fast cash is needed.

The Time Frames Involved

The next difference has to do with time. Applying for and processing a traditional loan is long and tedious. It involves a lot of paperwork that has to be done personally by the borrower. A payday loan can be done online in as little as five minutes, with the money coming in and available for use the day after.

How these two types of loans are secured is one of the main factors why a payday loan can be processed faster. Traditional loans require exhaustive credit checks and are usually secured against tangible property, like real estate or cars. A payday loan is secured against the borrower’s next earnings packet. Thus, only proof on employment or income needs to be provided.

Paying off traditional loans usually takes years. Payday loans, however, are expected to be paid off on the next payday, or at most two paydays later. Some payday lending institutions allow their borrowers to roll over the loan if interest is paid. The intent is to allow the borrower a little more time to gather enough resources to pay off the full amount borrowed in the next payday.

Research done in 2009 by the Booth Business School of the University of Chicago places the intended purpose of the payday loan in better light. This study found that people at disaster areas with access to fast loans like the payday loan were better able to cope with emergencies compared to others who only had access to traditional loan types.

The Interest Rate

One difference that has made many people think twice about fast loans is the interest rate. This, though, is a product of the risk that payday-lending institutions face. If one looks at data provided every year by publicly traded payday-lending companies, one will notice the high rate of loan loss due to default–at least 15%. On the other hand, banks offering traditional loans generally have loan default rates below 5%. While occasionally rising, these rates hardly ever reach 10%.

The expense of processing the loan, even with the brevity inherent to a fast cash type, also accounts for this higher interest rate. Studies that compare the payday loan lenders’ fixed operating expenses and losses with their profits show that their earnings are not really extraordinary.

In Summary

A fast loan like the payday loan is very different from a traditional loan. The loan amounts, the time frames, and the risks to the lender are different. They also serve different purposes. There are cases where a payday loan would be more practical than a traditional loan. A payday loan best fits situations where fast cash is needed and the borrower has the means to pay it off in two weeks to a month, or on the next payday.

Borrowers will also need to have a current account, as fast loan businesses will only deal with people who agree to accept funds via electronic transfer. Fast loan lenders also require to be paid back in the same way. They will set up automatic debits from this account and the days of repayment will be clearly spelled out in the contract. Normally, these days will be chosen to coincide with the borrower’s payday.

The interest is higher on a payday loan than on a conventional bank loan, but they are not so bad as to not be affordable to most people — provided that they pay back the loan on time. A representative will call the applicant shortly after their online application is received, in order to gather some required information. This will include identification, account numbers, telephone numbers for references and a pay stub, along with work contact information. Lenders are likely to call the bank and work references to validate the information given. However, credit status is not a consideration for an online loan. The only factor taken into consideration is the borrower’s ability to repay on time.

Once this part is complete to their satisfaction, the payday loan lender will send out loan documents displaying the amount approved, the dates payments will be drafted and the interest rate of the loan. Paperwork can be viewed and signed electronically. In most cases, the direct deposit will appear in the borrower’s account the same day.

Applying for an online loan is fairly straightforward. A pre-application is completed via the lender’s website, and then the applicant is contacted by a representative of the lender. Such applications are easy to find by doing a simple web search for “fast online advance” or “payday loans”. Once the borrower is contacted, some information will be required, such as identification and bank account details. It will be useful to have this information to hand, as they will call rather quickly. The online loan industry is competitive, and lenders will fight for borrowers’ business.

Credit ratings do not matter at all. The only factor that affects the application’s success is the borrower’s ability to pay the fast loan advance back. Borrowers are thus required to be in regular employment and to be able to prove this with a pay stub.

Expect the lender to make calls to verify employment and bank accounts. Once this is complete, they will send the loan documents online, along with the amount that the borrower has been approved for. The borrower merely needs to read the paperwork, sign on the dotted line and send the papers back.

Funds are directly deposited into the borrower’s account, and repayments are automatically debited on dates agreed when the loan documents are signed. If all goes well, it is likely that the money will arrive in the bank on the same day it is applied for.