If you’ve been in a financial difficulty situation before, you more than likely have come across the option of using a payday loan to solve your problems. But are these loans worth the risk? Let’s find out!
Payday loans have been around for a long time now. For the longest part of their existence, they have been used by borrowers as a means to pull through until the next payday. They are still used for that, but the term now covers a wider class of loans.
While payday loans are often thought of as a quick and easy way to get the financing that one needs, they are not always a suitable option for every borrower. One of the main reasons for this is their high cost. But even so, it’s critical to weigh the advantages and disadvantages when making a decision.
So, let’s have a closer look at the advantages and disadvantages of payday loans to determine whether they are a good option for UK borrowers.
Advantages of payday loans
Looking at the advantages of payday loans, the relevance is that you are able to survive and live life as you would until your next paycheck arrives. The following are the main pros of payday loans:
1. They are easy to access
Convenience is a major consideration for the majority of borrowers in the UK. Since payday loans are easy and quick to get, they make a good option for borrowers who are after a quick financial fix. In truth, you can apply to receive a payday loan online and have the money loaded into your bank account within 24 hours. That’s pleasant to a majority of borrowers since they typically use that money to handle unexpected costs such as emergency medical bills, emergency home repairs, or crucial car repairs.
2. Their requirements are fewer compared to other loans
Unlike other financing options, payday loans have a lower barrier to access. Think of the borrowers who have quite poor credit statuses coupled with low incomes, yet they are still able to access payday loans. If such borrowers were trying to get a loan from higher qualification institutions such as a bank, there’s a high likelihood that they wouldn’t have been successful.
3. You can secure a loan even with bad credit
Payday lenders don’t really worry about a borrower’s financial history, as long as they have a reliable source of income, which means that they are expecting a paycheck in the month that follows. Payday lenders almost seem to expect that the majority of borrowers will have bad credit, so they are ready for that, as opposed to traditional lenders.
4. It’s unsecured
A remarkable number of traditional lenders require borrowers to provide an asset as security for their loan which means that borrowers without such assets are limited. On the contrary; payday lenders seem to welcome almost every lender, with the major condition again being that the lender has a reliable monthly income. Not being required to provide security for your loan means that your property won’t be at risk.
5. 14-day cooling-off period
Feel like getting off the agreement within a period of 2 weeks? Well, that’s not a problem, since this form of borrowing is covered by the Consumer Credit Act 1974. The only condition that you have to meet, in this case, is being able to repay the loan amount as well as the accumulated interest.
Disadvantages of payday loans
Even though it’s quick and convenient to acquire payday loans, this type of lending has a number of drawbacks tied to it. Here are some of the most notable:
1. Payday loans are expensive
With some lenders charging an Annual Percentage Rate (APR) of up to 1,500%, it’s a no-brainer that these loans are surely expensive. Taking into consideration that there are other borrowing options that offer better rates, it’s no wonder most people who know about such options would never risk their chance with payday loans.
2. They are considered predatory
If you pay closer attention to payday loans, it would be easy to understand why most people think of them as being predatory: they target low-income earners who have bad credit. Even though this is how most lenders operate, including some traditional lenders, payday lenders are better known to prefer this approach. What’s more, they are notably harsh when pursuing unsettled debts, which makes them a less friendly financing option.
3. You could easily get into a debt cycle
Borrowers all over the UK fall into debt traps every so often, which can be attributed to bad decisions. If you take a payday loan and fail to pay on time, there is a high likelihood that you will resort to getting another loan to settle the first one. This makes you get into a debt cycle that is significantly hard to break.
4. Lenders may access your bank account
Payday lenders often prefer to use Continuing Payment Authority for loan repayments. What this means is that they have the authority to get recurring payments from your bank account. Even though you have the option to stop them, borrowers feel that payday lenders go too far.
5. Some lenders apply questionable practices during loan collection
Payday lenders, as earlier mentioned, are not the friendliest in the market. Over time, they have gained a negative reputation for using harsh debt collection methods, sometimes even sending threatening letters to debtors.
In most cases, the borrowers resort to finding alternative methods to clear their debt out of fear, without being fully aware of all options that they have. Thanks to the Financial Conduct Authority (FCA), this problem is slowly getting resolved even though borrowers still have a tainted view of payday lenders.
To sum it up,
Payday loans are a good financing option, but there are several other better options that you can consider before settling for a payday loan.
If you have to resort to a payday loan, make sure to carefully read the terms and understand them to avoid getting yourself into a debt trap, as that will make your financial situation much worse.