What is a payday loan?

There are occasions throughout the year where life isn’t kind to our finances. Whether it’s an increased bill or an unexpected payment, being caught short of cash can be stressful and make you dread the next few days or weeks until payday. For a lot of people, surprise payments might simply go on a credit card. However, for people without a strong credit history or a high credit score, mainstream credit options like credit cards might be out of the question. So not only are you worried about a payment you can’t afford right now, but you aren’t able to access the same kinds of credit that other people can. Because of this financial exclusion, payday loans came into existence.

Definition of a Payday Loan

A payday loan is a type of high cost short term credit. It allows you to borrow a small amount of cash, transferred to you on the same day, which you then repay in full on your next payday. It can help you manage your money while experiencing a financial shortfall. A payday loan is not a secondary source of income and it’s not intended to be a source of credit for all purposes. Payday loans should only really be used occasionally, and when they’re actually needed.

Other types of High Cost Short Term Credit (HCSTC)

High cost short term credit applies to any credit product which has an APR equal to or more than 100% and is borrowed for less than 12 months. While a payday loan typically means borrowing money for one month, an instalment loan is a short term loan which you can borrow over several months. Instalment loans help spread the cost of the borrowing as you make smaller monthly payments, instead of one lump sum payment, however the overall cost is higher as you borrow over a longer period. It’s a bit like paying for your car insurance monthly instead of annually.

What can I use a payday loan for?

Payday loans were designed to help people manage small cashflow shortfalls between paydays. Usually, payday loans are used to meet essential payments and non-discretionary expenditure if an additional payment comes up which you haven’t budgeted for. For example, having to replace a tyre because you got a puncture: this is not an expected cost and most people don’t have the spare cash lying around for this kind of emergency. If you need your car to get to work, you might consider a payday loan to cover the cost of the new tyre, knowing you’ll be able to repay the loan on your next payday.

Whatever reason you borrow money, make sure you only borrow the amount that you need. Perhaps you can budget a bit better and make the payment with the funds you already have? We might be a payday loan comparison site, but we would always encourage you to maximise your current funds before taking out a loan.

How to compare payday loans

The best way to compare payday loans is using an online loan comparison site. It’s quick and simple and might save you a few quid. Using Clear and Fair means the lender at the top of the search results is the cheapest direct payday lender for your enquiry because we don’t promote any lenders above others. Plus, it’s free so it’ll only cost you the few seconds it takes to load the results!