Calculating The True Cost Of Your Payday Loan

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Calculating The True Cost Of Your Payday Loan

Payday loans have changed completely to what they were when they were first introduced to the U.K over a decade ago. The Financial Conduct Authority has stepped in to regulate the industry with rules which determine how much interest a direct lender can charge their borrowers, along with a cap on fees.

Payday loans and short-term loans are going to be more expensive methods of borrowing money than say taking out a personal loan or a mortgage, but those types of loans are used for different purposes like buying a car, starting a business or purchasing a house.

Payday and short-term loans are handy when you have to pay a bill or have an emergency repair carried out on your car or home.

The Financial Conduct Authority took over from the Financial Services Authority (FSA) on the 1st of April 2013. The FCA has introduced new stricter financial regulations which control the payday loan market and help in protecting payday loan customers.

The FCA in 2015 introduced caps on daily interest rates and fees, these caps will protect consumers from having their payday loans grow out of control. Borrowers will never need to pay more than double the initial loan amount. For example, if you borrow £200, you will not pay more than £400.

When you are looking for a payday loan that you understand the real cost of borrowing and how much you will need to repay over the life of the loan.

This short article is designed to help you to break down the loan costs.

The Structure

Payday loans were created to service a demand for loans for small amounts of money that the borrower would repay on their next payday. These types of loans are to be used only for short term financial emergencies and never to be used for long term borrowing.

If you needed to borrow more than £1000 you would look for a personal loan from the bank who would be able to give you a better rate of interest. With a personal loan you can repay it over the course of many years as opposed to a month or three when it comes to repaying payday loans.

The Interest

The interest applied on a payday loan will be higher than that of say a mortgage or a personal loan.

The Annual Percentage Rate is calculated as the interest rate with any other charges added to the to the loan.

Here is an example: If you borrow £200 and you are to pay £20 in interest each month for 12 months, then the APR will be £24. The APR will take into account all the charges and therefore the APR will work out to be higher than the interest rate.

Nominal interest will be based on the loan amount. The interest added to payday loans will be a percentile value, this mean that it does not matter how much you are looking to borrow.

Most payday lenders will charge interest daily.

Fees

Not all lenders will charge the exact same fees. When you receive your loan offer you will need to examine what fees if any the lender is going to be charging. The FCA as stated above has put in place rules which cap the maximum allowed fees which a lender can charge and at the moment the fees are capped to 100%, this means that you will never pay double of your loan.

If you have borrowed £200, you’ll never pay back more than £400. This also means that no matter how many times you default during the life of the loan you will only pay twice the fee once.

Many people in the U.K struggle with debts and many do not know how to start to repay them speaking to a debt advisor is one of the best things you will do along with taking action yourself by speaking directly with your creditors.

https://www.nationaldebtline.org/ and https://www.moneyadviceservice.org.uk

You should always seek professional advice when handling debt problems. Cashute are not licensed debt advisers and any information contained in this article should not be taken as legal advice. It is your Responsibility to seek out correct legal advice

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Warning: Late repayment can cause you serious money problems. For help, go to moneyadviceservice.org.uk