3 Month Payday Loans

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When most people think of a payday loan they normally think of a loan which is paid in full on your next payday, after all, that is where the name originated from.

However in many cases this was not how the loan worked out. Payday arrived, wages arrived and there was not enough to pay off the loan in full. This lead to the loan being rolled over. Only the interest was repaid and the capital held for another month. This capital was subject to another month’s interest and 30 days later the same thing happened again. While this was great for the lender, it was unsustainable for the borrower who eventually either could no longer make repayment, or ended up many months later having paid hundreds of pounds in interest and still owing the same as they borrowed.

The regulator was starting to get very concerned about this practise of rollovers and many variants of the payday loan started to appear. The aim was to extend the loan term from one pay cycle but without the need to rollover. Some companies introduced 3 month payday loans, while others went for 6 months or longer. While these products forced the customer to repay capital and interest each month, probably because of the software that was being converted from a one month payday loan model, the same amount of capital was paid off each month along with all the accrued interest. This meant that the first repayment was higher, with the last being much lower. This made it very hard to budget for, and for 3 month payday loans, if you could not afford that initial first payment of the first months interest PLUS 33% of the capital it just would not work.

The next evolution which, like the payday loan itself, came from the USA, was the flexible line of credit product. “A credit card without the plastic” was how I hear this described. Again this allowed flexible repayments, often insisting that both capital and interest were repaid each month. This had its own problems. Not only was this complicated to understand with the same problem of higher first payments, but as you could draw down on this between repayments and so further restrictions had to be applied to prevent you spending your whole time at your credit limit. What you owed, what you had to repay and how much it was costing was now variable and made budgeting that much harder.

So what was the answer? Well take a mortgage or traditional loan, you borrow £x over y months and pay a set amount each month. At the end of the loan term, providing you made all the repayment, you own nothing more. There is therefore no reason why this same model should not work for the payday loans market, and so 3 month instalment payday loans were born. In fact the term does not have to be 3 months and a longer term, while costing more overall, can make monthly payments more affordable.

In fact the word ‘payday’ is now misleading as they are not repaid in full on the next payday, neither are they designed simply to get you to your next payday. The better name is 3 month instalment loans. Let’s face it the only differences between this and a bank loan is now the size, duration and interest rate otherwise the mechanics of the loan are the same.

You borrow you £300, you make 3 pre-determined equal payments over 3 months and that is it, loan over. While you will clearly want to consider all of the rates, cost of credit and compare APR’s to get the best deal, when assessing whether you can afford the loan you have 1 simple figure – the monthly repayment amount. Providing you believe you can afford this amount each month for the duration of the loan, then the loan is affordable to you.

 

3 month payday loans - are they good value?

As with so many things in life, loans come in various shapes and sizes. While a loan is typically a distressed purchase, after all does anyone get up on a Tuesday morning and get excited because they are going to take out a loan today? No I don’t think so. Buying car tyres is probably more exciting than choosing a loan.

Most people will consider how much the loan is costing, they will consider the APR, consider how much the repayments are going to be each month, they will consider the application fees, the set up fees, the transfer fees, but often careful consideration is not given to the length of the loan.  Why does that matter you ask? After all I know I can afford the monthly repayments, I know how much the loan is costing me, why would I worry about how long I have the loan for?

Well the answer is simple, and forms one of the downsides of instalment loans. Assume the interest rate and amount borrowed stays the same and we are not affected by the Financial Conduct Authority rate caps. The longer you have the lenders money the longer they will want to earn from that. SO taking a 3 month loan will, while providing cheaper monthly payments, cost more overall than a 1 month loan. The longer teh term, them more the overall cost. Additionally, you need to be able to make ALL of the repayments, not just the first. So the longer the term, the longer you will need to predict your busdget for.

The warning for 3 month payday loans must be the same as with most loans, buyer beware!

About the author:

Simon Hatch is the co-founder and Director responsible for Compliance, Risk and IT, at True Blue Loans (www.trueblueloans.co.uk) a company offering instalment loans over 3, 5 or 6 months, with fixed repayments and no fees, just daily interest.