Payday loans are generally the most vetted for emergency or short-term financial requirements. With no stringent credit score or income requirement, one may easily qualify for these loans. In recent years, the approach to borrowing and repayments have changed a bit.
Payday loans are indeed easy to qualify for. This ease of accessibility makes individuals vulnerable to debt. According to the Guardian, “Around 57% of individuals are encouraged to take further payday loans.” Around two-thirds of these use it for household bills and to buy essentials like food.” Thus, while seeking payday loans one must be conscious of certain aspects.
As per the same source, “ around 1in every 5 payday loan holders find it hard to repay on time.” It is primarily because of the unclarity of purpose and unaided repayment planning. If you use it responsibly, you can pay the debt.
The blog states some aspects to consider while using a payday loan.
What does a payday loan imply?
Payday loans are short-term and same-day cash facility that allows one to close a cash need before salary day. One can use these loans for any purpose like- paying a bill, home repair, credit card debt consolidation, paying for a student trip, etc. These loans are unsecured in nature which one may qualify for on an income basis.
It does not require one to have a stellar credit score. One may qualify even with a bad credit score. As these loans are short-term, they have competitive interest rates. Here competitive implies missing a payment or defaulting on the loan may impact your credit score. Whereas, if you ensure regular loan repayments, your credit improves.
These loans usually have 12 months of repayment structure. One can choose to repay in monthly or weekly instalments. As these have fixed interest rates, the repayment amount remains the same. Missing a payment could add to the debt.
7 Payday loan risks and the Best Way to Reduce the Impact
A lender usually requests money after 2-4 weeks of taking the loan. However, you must be aware of some aspects before applying for the same:
1) Overarching interest rates
The interest rates on payday loans are as high as 1500% APR. It is higher than any other short-term loan. However, it is still more affordable than credit cards. On defaulting with credit card debt, you may experience late fees and heavy penalty charges.
However, payday loans have capped interest rates. It implies no lender can charge beyond the standard interest rate. As per FCA, “ if a person takes out a loan for 30 days, a lender can charge £24 per £100 borrowed. In addition to that, £15 fee and interest costs on default payments.”
Thus, you can skip overarching costs here.
Before applying for a payday loan, always compare the interest rates and APR. Use the loan calculator and check the best amount to borrow and the repayment. You pay a higher sum on a longer repayment period. Thus, keep it short and easy to manage one as per budget.
2) Debt-trap payment cycle
If you miss 3 payday loan payments in a row, you may attract high-interest costs and missed payment penalties. However, some lenders assist borrowers caught in a debt cycle. Delay in informing the lender may lead to grave circumstances.
To skip these high-interest costs, identify other loans with better APRs like- short-term quick loans, no guarantor loans, or text loans. If you do not have any, contact your lender quickly. He may help you with the apt solution to your finances and debt clearance.
3) Automatic payment deductions
When you approach us for a payday loan, we provide an agreement with the flexibility to choose CPA ( Continuous Payment Authority). It implies we deduct payment from the account on every due date. It eliminates any hassles of remembering payments. One must ensure some balance for CPA to work.
If you believe that CPA impacts your financial well-being, pay manually. You just have to inform us about the same. The bank may stop the payments immediately.
4) No detailed credit checks are required
Payday loans are easily accessible because it does not require detailed credit screening. Thus, individuals with poor credit screening may be encouraged to apply. If it does not meet your expectations or prove high on your budget. It leads to unnecessary competitive interest debt.
To avoid this, analyse cash requirements, liabilities, income, and repayments. If you have too many short-term loans, avoid applying for another. Identify the costs and fees associated with the amount if you miss a payment. It will help you borrow the right amount. Do not fall for a soft credit check; identify and prioritise the affordability.
5) Non-repayment ability leads to default
Finances do not stay the same always. For example, if you lost your job but need immediate money for medicines or doctor consultations, you can get payday loans for the unemployed on benefits income. You can get it within 15 minutes in your account and use it.
However, if your savings collapse and you can no longer continue payments, it may lead to default. You can here take the lead by stopping payments for a while. In this situation, you can discuss the issue and cancel the payments by:
- Instruct the bank to cancel the automatic payments
- Cancel the cheque payment to the payday loan company
- Re-schedule the payments to pay as per current finances
- Request a payment holiday from the provider
6) Failure in understanding terms and conditions
Every lender has different terms and conditions, and so do we. Most individuals fall into a debt trap due to misunderstandings and unclarity on loan terms. For example, you may have queries like-
I lack any income source. Can I get a payday joint loan for a bad credit score or not?
It may be due to no or limited credit score. With us, you may get a joint payday loan if you need only a small sum but lack unemployed benefits or any part-time income. It is unusual to find such a facility in the country.
Thus, apart from ensuring transparent terms, we help customers by walking in their shoes. You can check the terms and conditions closely and ask if issues. Partner with the right lender that keeps the costs upfront and leads you to loan closure effectively.
Bottom line:
Payday loans are ideal for emergencies and everyday expenses. However, the overarching interest rates and costs may impact the loan payment. Thus, analyse your budget and requirement before availing payday loans. Check the terms, APR, interest rate, and overpayment fee before applying.
Jessica William operates as a Senior Consultant and Chief Content Editor for 10 years at 1Onefinance. She assists the firm in getting a grip on the new lending laws and regulations. She does so by researching the trends, consumer requirements, and new audience preferences. Jessica is responsible for making important financial and administrative decisions.
Apart from helping consumers with the best solutions, Jessica Williams helps them ensure financial stability. She analyse the business data, finances, expenses, and revenue/ income of customers and determines necessary changes. Jessica finished her Doctorate in finance and law and implements her knowledge to the best interest of the firm and customers.