By the time you’ve finished school, got your first job and moved out of your family home, you’ve probably heard of a payday loan even if you’ve never used one. They used to be advertised on the television and radio, and a few years ago they received some controversial press in the news. However, payday loans are strictly regulated and receive regular reviews into the conduct and management of lenders to ensure the consumer (that’s you) remains protected.
Payday loans service a wide range of individuals who struggle to find credit in mainstream formats. Not everyone can access credit cards and arrange overdrafts with their banks; either because they don’t have much of a credit history or because their credit history is poor.
A credit record stays on your credit files for six years and a lot can change financially, mentally and emotionally in that time. It means that people who were perhaps irresponsible half a decade ago, are still suffering the consequences of their actions. While there has to be some form of measurement for people’s creditworthiness, the current system means some people are financially excluded from accessing the common kinds of credit that people with a good credit history needn’t think twice about. In some cases, it’s justified. But in others, it means people with every intention and ability to repay a loan can’t access credit when they need it most. It can lead to arrears, missed payments on priority bills or even a reduced income (if you’re borrowing funds to get to work).
While payday loans are a form of high cost credit, they can be extremely helpful in allowing people to manage their everyday expenses on occasion throughout the year. Until recent overdraft changes, payday loans were actually cheaper than unauthorised overdraft charges, so it’s not hard to see why people may have opted for a payday loan in times of need when they couldn’t access an arranged overdraft.
Payday loans now tend to be used in emergency or urgent circumstances thanks to the quick, online application process provided by most lenders. Generally, payday loan applications take just minutes, and automated assessments mean you receive the loan decision instantly. The loan is transferred using the Faster Payments Service (FPS) so you can usually cover your immediate expense within the hour. Then, you repay the loan on your next payday or over the next few months – whichever repayment schedule suits you and your financial circumstances.
It’s important to remember that while payday loans are accessible to people with bad credit (hence sometimes being called ‘bad credit loans’), lenders will always conduct affordability and creditworthiness assessments prior to approving an application. While you may need to borrow money quickly, it’s never sensible to do so if repaying the loan will land you in a worse financial position. If you do find you are becoming increasingly dependent on credit, or you frequently miss your regular bills and payments, a payday loan will not help you. Instead, you might need to seek free debt advice for tips on how to better manage your money, and maybe even create a more solid solution to repay debts you may have. Proactively repaying your debts will result in you having a bigger disposable income available for savings and meeting future unexpected payments, in turn improving your financial resilience.
Payday loans can help you if you need to borrow money quickly to meet an emergency payment or a priority bill. Ideally, they shouldn’t be used for non-essential purchases because you have to pay interest on the loan, which means spending more money than if you had waited until payday, or until you’d save enough to make the purchase outright. Additionally, payday loans generally work best when used very occasionally throughout the year. If you find yourself applying for a payday loan more than 3 or 4 times in a twelve month period, you may need to consider adjusting your budget to allow for unexpected payments. Trying to save just a little each month will help reduce your dependency on credit in times of emergency.
Ultimately, payday loans are a helpful borrowing method, but they are expensive compared to other forms of credit and should be used responsibly. Before applying, you should always consider your financial circumstances at the time of repayment, not just at the time of application. If you are applying for an instalment loan over a few months, check if you have any annual or infrequent bills due which could mean you are unable to make your loan repayments on time. Things like MOTs, house insurance and tax payments can catch people out as they’re not regular bills.
Missed or late repayments can be recorded on your credit file, and in some cases, you might incur default fees. These fees can throw your budget off for the rest of the month, but longer-term, missed payments for any credit, including payday loans on your credit file, can make credit much harder to obtain in the future. Prolonged missed payments could lead to a default which is a red flag for many lenders. If you find yourself unable to meet your agreed loan repayments, even if the circumstances are outside of your control, get in touch with your lender as soon as possible so that you can arrange a new repayment plan and avoid incurring late interest.
Payday loans can help you manage your finances and meet unexpected payments, but you have to be a responsible borrower and only apply when you really need the funds.
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