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What Is APR and How It Works

When taking out a payday loan or any sort of loan the lender will state what the APR is on the loan you take but what does this really mean as many customers do not fully understand what APR.  You will see APR on everyday things such as your bank statements, card statements and financial adverts.

An APR is an abbreviated term for Annual Percentage Rate,  and technically is defined as a numeric representation of your interest rate in other words APR gives you an indication on how much money will need to be paid back in interest on top of your initial loan and generally the lower the APR the less that will need to be paid over a specified period. The APR is usually based on monthly interest.


 

Payday Loans Working In A Representative APR Environment

Payday loan lenders and instalment lenders have to state their APR terms as a representative APR. A representative APR is the interest rate based annually and by law and by the Financial Conduct Authority all payday loan lenders and instalment lenders need to state this in representative APR format. Sometimes you will see interest rates at about 2000% for these types of lenders but this rate includes the normal monthly APR times 12 months rolled into one rate and also includes potential fees if any incurred such as faster payment or late fees. If payday lenders were allowed to state the monthly APR then the interest fee would not look so shocking as the rate shown is annually not monthly. Here is an example of a typical loan –

A lender may loan you £100 for a 30 day period and typically there is a representative APR of 1221% so it may look like you have to pay back hundreds for this loan when in actual fact there is only £24 to pay on top of the loan as the rate is shown annually rather than monthly

All fees and charges will be clear to see when completing an application with a lender always read and understand the terms and the amount needed to be paid back before agreeing to any loan.


 

Comparing APR Rates To Get The Best Deal

APR’s are a great way to compare different loan lenders so when choosing a lender always check who has the best and lowest APR rate which mean’s the less that will need to be repaid and always remember that short term lenders state the rates as a representative APR based annually and may not be an accurate representation of what a loan will cost based over a one month cycle but always triple check with lenders to be sure what will be needed to repay.

 

 

 

 

What are the payday loan alternatives?

Following a recent article on October 12th in the Financial Times about ‘borrowers urged to look at alternatives to payday lenders‘ we have compiled a helpful list of ways to obtain funds without taking out a payday loan.  We appreciate that the high-cost nature of the loans we recommend and whilst the speed of a payday loan is ideal for an emergency, there are certainly payday loan alternatives available and other options for those who may be experiencing debt-related problems. In this page, we discuss various payday loan alternatives and ways of getting money if you need it quickly.

Borrowing from friends and family

This is one of the most traditional ways to borrow money, especially when you need it quickly. Although its not always easy to ask people you know for money, the majority of payday loans are for small amounts and if its less than £100 that you need, you may find that a family member is able to lend this to you. Above all, the best thing about borrowing from people you know is that there isn’t any interest or late penalties involved. So not only can you borrow the money you need but you won’t be worse off paying it back. This should probably be your first port of call when you are looking to borrow money.

Make money by selling your old items

You would be amazed how much junk we have lying around the house and there are people who are willing to pay money for it. Whether its selling your old goods at the local car boot sale or better, selling things online, can make you a few hundred pounds for one day’s work. Things that are people buy that are second-hand include clothes, CDs, mobile phones, gadgets and furniture.

The likes of Ebay and D-pop are ways that you can take pictures of your items on your phone and quickly upload them for someone to buy online. Facebook and Twitter are also useful ways to sell things online by advertising them to your friends. There is a lot of money in selling your old mobiles. Usually when you finish with a mobile phone, you just put it in your cupboard but there are companies that are willing to pay good money for a second hand mobile phone and if its a smartphone, a phone company like Envirofone could be willing to pay over £100 for it the next day. In some cases, this could be quicker than a payday loan.

Save money with discount and cashback sites

If you require a short term loan because you need to pay for something specific, there are several discount and cashback websites to help lower the cost. Whether its sites like VoucherCode, TopCashback or Quidco, the opportunity to get huge discounts on things like mobile phone bills, utilities and furniture mean that you could make big savings and avoid having to need a payday loan to fill the gap. The way cashback sites work is slightly different to a straightforward discount – instead of 20% being taken off the bill, you pay the full price and 20% of the cost is paid into your debit account as ‘cashback.’ So using a cashback site, you feel like you are actually being paid and you can see how much cash has been sent to your account.

0% Credit Card

There are various banks which offer a 0% credit card meaning that you take out the credit card and pay no interest provided that you pay on time. So if you feel comfortable that you will certainly be able to repay after a month, this could be a very sensible alternative. Money Saving Expert recommends a number of 0% credit cards from the likes of American Express, Tesco and Halifax. If you would normally borrow a few hundred pounds as a payday loan, a 0% credit card could provide you with the few hundred pounds and you will only pay if you miss the repayment, usually via direct debit on a monthly basis. Therefore, like any payday loan, you will need to stay on top of your repayments but it could prove significantly cheaper.

Credit Unions

Credit Unions are also very sensible payday loan alternatives. This refers to a non-government organisation that offers very very low interest loans for similar amounts that you would borrow with a payday loan. A credit union is usually based in your community like in churches or on the high street and you are eligible based on your work position favouring those union members such as policemen, nurses, fireman, factory workers and teachers. The downside of borrowing from a credit union is that it takes a few days for the funds to clear which is why people might prefer our payday lenders because they are so much quicker. But to give you an idea of how much cheaper it is, CUOK! which is a credit union specialising in payday loan offers only £12 repayment for a £400 loan for a period of one month – far cheaper than other short term loan out there.

 

Where can I get advice about my debt?

Payday loans should not seen as a long-term solution to debt problems. If you think that maybe there are much longer term issues regarding your personal finances that an injection of cash won’t solve, it is worth seeking advice and speaking to professionals. For help, go to moneyadviceservice.org.uk

 

How much can I save by comparing payday loans?

On 9th October 2014, the Competition Markets Authority payday loan proposal was presented  to increase the use of payday loan comparison sites in the UK above all to help borrowers save on the cost of their loans. Given that payday lenders have different rates with some offering an APR higher than 5,000% and some offering lower than 1,000%, there is clearly an opportunity to price compare.

In a study carried out by the Payday Lending Investigation Group, they discovered that by not using price comparison websites, borrowers could be adding £5 to £10 to the average cost of their payday loan. If we base this on a typical payday loan of around £260 and given that the average borrower may take up to 6 loans over the course of a year, this could mean that some customers are paying an extra £30 to £60 per year more than they need to.

Simon Pollito who is Chairman of the Investigation Group highlighted the following points:

 

How customers will save on payday loans

The role that comparisons sites have in the payday loan market is a big one. Taking into account that there are over 1.8 million borrowers of payday loans each year, the opportunity to pay less simply choosing another lender is very appealing. The CMA will encourage comparison sites to possibly change the way they display their information and this may include the following:

 

What we offer

The Lenders List is very straightforward price comparison website for payday loans. We do exactly what we say on the tin – we are a list of lenders. Simply listing the lenders, you can click on ‘more details’ to see an individual breakdown of the company, the checks they do and the prices they charge. Our service is completely free to use and we do not take down a user’s details and pass these on anywhere.

One important feature of The Lenders List is that the companies we promote are direct lenders and we do not work with brokers. The reason for this is that we only want customers to be able to compare companies that can directly put the funds into your account. We don’t want there to be any further middlemen especially when they want to get their loan quickly because its an emergency. With hundreds of lead generators in the UK, it is sometimes hard to determine who is a lender and a broker.

The CMA has found that many borrowers believe that lead generators are themselves actually lenders rather than simply middlemen. Customers are generally unaware that, rather than matching borrowers with the most suitable or cheapest loan on offer, lead generators instead sell borrowers’ details to lenders based on the fees lenders offer to them.This is briefly mentioned in the checklist above – as soon as a user applies through a broker, several lenders may check the customer’s credit score and numerous checks on ones credit file can be damaging. A simple comparison site will prevent people from having their credit file being checked as it will only be checked on those that apply on a lender’s website. The changes above will certainly drive competition and above all, push the lenders to offer more affordable prices and default charges in order to feature better on price comparison websites. The Lenders List offers a very simple way to find a direct lender who can transfer the funds to your account today and by browsing through the site in more detail, users will be able to compare the length and cost of a payday loan efficiently.

Comparing Payday Loans and Credit Unions

Payday loans vs Credit Unions

We appreciate that payday loans are an expensive form of  short-term credit. For customers looking to borrow up to £1,500, payday lenders are a viable option because they can transfer the funds to your account within 15 minutes. However, the convenience comes with a price which is why the APR is higher than your standard loan on the high street. But if you don’t need the funds in a rush and are willing to wait a few days, you can obtain the same amount you need to borrow from your local credit union and pay significant less. In this page, we plan to give you a better understanding of what credit unions, how you can join one and how they are different to payday loan lenders.

What is a credit union?

A credit union is a non-profit community-based loan provider. Originally starting in the mid-1800s in Germany, credit unions are all about members helping other members in their local community to save on loans and reduce their debt. There has always been an emphasis on credit unions operating in churches with some donations to the Church going towards helping members of the community. More recently, credit unions have become recognised financial institutions with over 500 in the UK serving their local communities and over 1 million members in Great Britain. CUs can be found on several high streets across the country and the financial product range includes payday loans, mortgages, saving accounts and current accounts.

Typically credit unions will help those who may have been rejected for other ordinary bank products. To be accepted as a member, you need to have something known as a ‘common bond’ with other members. This may be your geographical location – most credit unions are exclusive only to their borough. Another common bond is your line of employment, with credit unions common for working class like teachers, policeman, nurses etc . But ultimately credit unions are for everyone and if you go to your local credit union for the borough you live in, you should be able to become a member.

How is a credit union different to a payday loan?

There are several differences between a credit union and a payday loan lender. However, it should be noted that more recently, credit unions do offer payday loans in the sense that you can borrow a few hundred pounds and repay on your next pay date.

Rates: The rates for a credit union are significantly lower because they are not-for-profit organisations compared to payday loan lenders who are private and profit making companies. Credit unions are limited by law in the APR they can charge – there’s a maximum of 42.6%, meaning your ‘payday’ loan will cost much less. This is why you find that a payday loan with a credit union may only cost you a few pounds to repay (see examples below).

Speed: This is something that we mentioned earlier on the page. Payday lenders promise instant decisions and quick funds with many able to transfer hundreds of pounds to your account within an hour if you have been successful. By comparison, credit unions take longer to process your application and transfer your funds, sometimes up to 5 days. This is why credit unions can be a fantastic option if you are prepared to wait a few days because despite the delay, you will really pay pittance for your loan.

Credit unions cheaper than payday loans

Based on these examples above of credit unions that offer payday loans, you can see there is a significant difference in the price. The repayment for borrowing a payday loan from CUOK or Six Towns is nothing more than a few pounds repayment provided you are willing to wait a few days to receive the funds. You can even repay early and there are no extra fees (this is available with some payday lenders where some charge early repayment fees and some do not). You will notice just under the table that if you do want the funds on the same day, you will have to pay £11 or £15 which is actually 1,000 times the repayment! But overall.

At The Lenders List, we are all about allowing our customers to compare loans and find the cheapest product for them on the right terms. Recent investigations carried out by the CMA showed that lenders could make big savings by comparing payday loans which is why we are thrilled to offer a simple list of lenders as our comparison. We encourage users to visit the individual pages of our lenders to see the types of checks they carry out and the fees that they charge so they can see how much they could save by using various lenders. Our website is constantly updated with useful blog posts and we encourage users to get in touch with us by email if they have any questions.

What is Responsible Lending?

Responsible Lending refers to how lenders provide their loan products in a way that is transparent, fair and in the interest of the customer. The practice of Responsible Lending is something that we regularly mention on The Lenders List because we only want to feature loan companies that are responsible.

The Financial Conduct Authority (FCA) began regulating the payday loan industry on 1st April 2014, taking over from The Office of Fair Trading. In the FCA guide on Responsible Lending, the regulator explains what is expected of payday lenders in order to be compliant to operate in the industry. Below we highlight some of the key features of this practice:

Transparency

Responsible lenders should clearly explain the loan products that they are offering. A compliant lender will clearly state the rate of APR on their website and be clear about the repayment examples. A lot of lenders provide a loan calculator on their websites and this is a useful way for applicants to get an idea of how much they can borrow and repay.

The FCA guidance explains how all financial promotions should be clear, fair and not misleading. There are many payday loan brokers in the industry who do not provide the customer with the loan, they simply recommend other lenders sometimes taking a fee from the applicant. Transparency is important so that the borrower knows exactly what they are getting when they fill in an application page. For this reason, The Lenders List only features direct payday lenders and we do not recommend brokers.

In this example below with Mr Lender, one of our featured lenders, you can use the calculator to see exactly how much you are going to repay and the APR is clearly visible. There is also more information about Responsible Lending included on their homepage:

 

 

Lenders Carrying Out Appropriate Checks

Several lenders have come under criticism recently for granting loans without running adequate checks. As part of the Responsible Lending procedure, lenders must run something called affordability checks – this refers to the measures that lenders take to ensure that a customer can afford to repay their loan. This can be achieved by confirming their salary by calling their work to check that they are employed or by requesting a copy of their payslip, p60 or bank statement.

Whilst not all payday lenders run credit checks, those lenders that are indeed taking time to run appropriate credit checks are taking the initiative to understand a customer’s finances better so they can base their loan decision on this.

Collection Practices

The FCA guidance wants to encourage payday lenders to collect the repayments from their customers in a compliant and responsible way too. There are certain things like ensuring that a customer’s account is not attempted more than twice a day for collection on the day of repayment. This is so that if the customer cannot afford to repay, the lender can get in touch before the chance that money might be able and then collected without notice. There are other practices such as limiting to two rollover or extensions on any given loan. This is to help prevent a customer entering a debt spiral by topping up their loan again and again.

If a customer is unable to repay their loan, responsible lending encourages the loan company to offer forbearance and be willing to help the customer by freezing repayments and arranging more flexible repayment plans depending on their circumstances.

Above all, to emphasize the risk of high-cost short-term loans, lenders must exhibit the risk and warning labels on their websites. Therefore, if a customer is having financial troubles as a result of a payday loan or is looking for a payday loan because of financial difficulty, they can contact MoneyAdviceService below.

What if I cannot repay my payday loan?

When it comes to repaying your payday loan whether its over 1 month, 3 months or 12 months, we appreciate that ones financial circumstances can change and therefore it is important to know the consequences and what options are available if you are not able to repay your loan. As part of your agreement with the lender, you will be required to repay the loan on a specific date of the month, usually your pay date, the last working day of the month. Please find out guide below of what happens if you cannot repay your loan.

Default fees, extra charges and negative impact to your credit score

  • Lenders will charge a one-off default fee for missing repayment. This ranges from £15 to £30 depending on the lender but the new price cap being introduced by the Financial Conduct Authority in January 2015 will limit this default charge to £15 maximum. Borrowers will receive reminders via email and SMS for up to 5 working days before their repayment is due, so you have a bit of notice to get the money available in your debit account ready for collection. If the money didn’t enter your account on the day you were paid, you can raise this with the lender who may be lenient on your default fee.
  • Customers that pay late will also be charged a daily interest for each day that their loan has not been repaid. For instance, if your payday loan lasts 20 days and you haven’t paid on the 20th day, you will still be charged the same daily interest for the 21st, 22nd, 23rd day etc. This is because you are still paying to have your loan open with the lender until it is closed. The daily interest for a typical lender is around 1% a day but this will be capped to 0.8% when the new price cap comes into place. Whilst 1% a day seems small, this can add up when accumulated over time and borrowers must be vary of this. According to the regulation that lenders follow, all interest must be frozen after 60 days.
  •  Not paying on time will not only be more expensive but it will be reported on your credit file. Therefore, if you have missed a payday loan repayment, this will impact negatively on your credit score and may affect how accessible you can obtain credit in the future. On the flip side, if you repay your payday loan early, it may impact positively on your credit rating.

Can I get a rollover or renewal?

Yes, some lenders will offer ‘rollovers’ where you pay a fee to extend the length of your loan but numerous rollovers can cause the amount to be repaid to increase dramatically. Please find the example below to understand how rolling over a loan can be very costly. For this reason, the responsible lending criteria outlined by the FCA limits rollovers to two maximum for an existing loan, in order to prevent the customer from falling into a spiral of debt which they cannot repay.

 

However, there are some lenders that strictly do not offer rollovers and will not renew or top up any existing loans.

Enter into a Pay Plan or Arrangement

If you are unable to make your repayment, you can speak to the lender who might be able to offer a more flexible arrangement or pay plan. For example. if you owe £300 to clear your loan, a pay plan could consist of paying back in two repayments of £150 or three repayments repayments of £100 – just something more flexible to help clear the balance. According to the regulation, if you explain to the lender in advance that you cannot repay, a responsible lender should be able to offer forbearance and be willing to accept an arrangement whilst freezing interest and not adding any further default or late charges.

Debt Management

If you are unable to repay your payday loan in addition to other outstanding debts, an option is to enter a debt management plan or work with a debt relief agency. There are several firms that can help you organise all your debts and manage all your expenses so you can eventually clear your debts over a very long period of time. MoneySavingExpert offers a useful guide about approaching Debt Management.

Do I really need the loan?

Before you apply for your loan with one of our lenders, it is important to consider how much your really need the loan. Payday loans are expensive forms of credit and are intended for emergency bills and expenses and borrowers should consider how they plan to repay the loan and interest before they apply. High cost short-term loans such as these should not be used to fund a material lifestyle nor to pay off other payday loans. For help, go to moneyadviceservice.org.uk