From 2006 until 2010, the online payday loan industry grew at an unprecedented rate. (Read the article about the history of payday loans)
In 2009, four times as many people were making use of payday loans than had done before in 2006.
This growth was attributed to the fact that people could apply for pay day credit online.
Applying online meant that consumers could borrow money at their own convenience. They did not have to visit their bank, nor wait for traditional opening hours.
In fact, payday loan application forms could get submitted at any time – day or night.
Consumers also enjoyed the privacy that online payday loan applications afforded them. They could complete their application in private – away from prying eyes.
Not only this, they could do so from the comfort of their bedroom or in front of the television.
For many it was helpful their loan applications could get carried out without speaking to another human being.
Applying for a loan was embarrassing. Particularly for people that didn’t want to admit that they needed extra cash.
Accessing payday loans online gave people the funds they needed when they needed it the most.
How do payday loans online compare to high street alternatives?
The practicalities of loan applications
Applying for a loan can take a lot less time when you are filling in an online form. You do not need to visit a physical location.
In most cases, you will not need to provide extra evidence. If you do, this gets sent by mail or by email.
Some lenders will allow you to access a secure account area by logging in so that you can upload your files.
Most people appreciate the convenience of applying for short-term finance online. Especially with the speed at which their application can get processed.
Others, prefer speaking with somebody in person.
If you are unsure about anything, it can help to have an advisor who can talk you through your loan application.
Visiting a branch of The Money Shop, or going into your local bank, will take time.
People usually plan these visits in advance. Which means that they have time to think about what they are doing.
If you get concerned you might get tempted to borrow money without careful consideration. Then we suggest you wait 24 hours or apply at a physical location.
Payday loans are high-interest forms of borrowing, intended for the short term.
The APR of a loan can vary from provider to provider. But typical APR figures for Wonga and QuickQuid are 1,509% and 1294.1% respectively. These are two of the market leaders.
Other forms of online payday loan have lower APRs, including SafetyNet Credit at 68.7%.
With a payday loan, you will never pay back more than double what you borrowed. Default fees get capped at £15 and interest gets capped at 0.8% per day. The high APR gets calculated by predicting the cost of a short term loan over a full year. Although they last for no longer than six months.
Alternatives to payday loans online
The Money Shop is a payday lender with both an online presence and offline stores. Where customers can apply for money in person. They publish a representative 709% APR for online loans and in-store loans. The Money Shop also offers guarantor loans as a borrowing alternative, at representative 49.7% APR.
Loans from the bank have lower interest rates. But they are for larger amounts and over longer terms. This means that you could end up paying more for your loan. Halifax offers loans from £1,000 for a representative 28.9% APR, whilst 29.8% is the APR quoted for the same by TSB.
A payday loan may cost more. But you have the option to apply for a smaller amount and repay the loan quicker. Which means that you do not need to have the debt hanging over you for a year.
Which is the better option will depend on your circumstances. And your ability to repay your loan quickly, or the amount of money that you actually need to borrow.
Challenger banks. Smaller banks that are taking on the high street names such as Lloyds, Halifax, and Natwest. Offer a further alternative.
Metro Bank is one such challenger, offering personal loans at a fixed 5.9% APR. You must apply in-store. And they are for values between £2,000 and £25,000. Which means they may be the cheapest loans available. But they come with a long-term commitment and will need to be for higher value borrowing.
Overdrafts as an alternative to payday loans
If consumers prefer not to apply for a loan, they may see their overdraft facility as an alternative.
Bear in mind that some authorised overdrafts come with fees as high as £1 per day. Whilst an unauthorised overdraft can cost up to £100 per month.
An authorised overdraft may be a cheaper alternative to a payday loan. But you may find yourself in a debt spiral unless your clear your overdraft quickly.
Fees and charges can continue to mount indefinitely. Bank overdrafts not subject to the same FCA regulations as payday loans.
Overdraft charges can get added even when you do not have a further overdraft buffer available.
If you are at the limit of your authorised overdraft, be aware those fees could push you into unauthorised borrowing.
At that point, you would be paying the higher charges associated with unauthorised overdrafts. As much as £5 per day.
Overdraft charges can continue to build until you pull yourself out of your overdraft. This does mean that, in a worst-case scenario, you could get charged up to £100 per month in fees alone. Whilst sinking further and further into debt.
Your overdraft may be more convenient and easier to apply for. But before making any financial decision it is important to weigh up the long-term costs. Whether you choose payday loans online, traditional loans from the bank, or your overdraft.