A payday loan provides borrowers the facility to obtain a relatively modest cash advance on their next pay cheque. Now available in the UK, a payday loan is a personal borrowing facility devised and developed in America. It can be helpful to those of you who do not have access to a quick decision short term loan, or who may be declined under normal criteria or have no credit card.

As it suggests payday loans are a very short term personal loan. This type of borrowing has been developed to tide employees over until their next payday or in some cases a subsequent payday. The loan is usually made available within 24 hours and normally paid directly into a bank account. Once the repayment period has elapsed, coinciding with the next, or agreed subsequent, payday, the entire sum of the loan is taken from the bank account by automatic debit, together with the lenders service fees.

They best fit the circumstances when a one-off unexpected expense comes along, and although the money will be comfortably available out of next month's salary, right now it's an embarrassment and there really is no other way to meet the debt.

This type of borrowing differs from other types of personal loans regularly available in that the lenders do not charge a daily interest rate but a fee stipulated at the time of the loan. The fees that are charged will depend on the amount of the loan and the borrower’s credit history. Extra fees are applicable for extending the payday loan over a longer term.

The eligibility criteria for this type of personal loan can be very low. Intending borrowers with a bad credit history, CCJs (County Count Judgements), loan defaults or even bankrupts are unlikely to have problems when applying for a payday loan, although the service charge is likely to be higher the worse the credit history. This is because the whole personal loan is repaid from the bank account receiving the borrower’s regular earned salary on the day the salary is paid in.

The fees, however, can be very expensive when compared with normally available forms of borrowing, like credit cards. Many lenders providing payday loans charge around £25 per £100 borrowed regardless of the term to the next payday. There are no other charges provided the loan is repaid on the due date. As a comparison, £200 in cash borrowed on a credit card for a month would result in an interest charge of around £4.60 (@ 2.2%/month) but the same amount of £200 borrowed on a payday loan would incur a fee of around £50.00 (@ 25%/month). The comparison is worse if a loan period to the next payday of less than a month is considered, with APRs well in excess of 1200% being common!

Payday loans should be considered very carefully and financial advice sought if debts mean that the regular household income does not meet outgoings.