How to use payday loans sensibly

Payday loans can be a very useful way to borrow when you need a little bit of cash to see you through until payday. Usually, someone might use a payday loan to cover an emergency expense, or to ease cashflow if a priority bill comes in higher than usual. As with all types of borrowing, there are responsible ways to use payday loans and it’s important you factor these things in when considering if you need one, especially as they are a high interest form of credit.

Definition of a payday loan

Payday loans, also known as same day loans, are a type of high cost short term credit (HCSTC). As the name suggests, this means payday loans have a high interest rate over a short loan term. They are a type of credit, so you have to submit an application which is subject to affordability and creditworthiness assessments, but if the application is approved, you will typically receive the funds within minutes.

HCSTC also includes instalment loans, which work in the same way as payday loans, but instead of repaying the entire balance on your next payday, you can split the sum over several paydays. While this costs more overall, as you are borrowing for longer, often the smaller individual amounts are easier for people to manage along with their usual financial commitments.

How to use a payday loan sensibly

Using a payday loan sensibly requires a bit of common sense and forward thinking. It can be easy to act irrationally in a moment of desperation or panic, which can lead to irresponsible decisions or taking out credit without thinking about any future financial responsibilities. Although it may solve an immediate problem, using credit thoughtlessly can lead to missed payments, arrears and general over indebtedness.

Step 1: Check your upcoming budget

If you haven’t already, it’s a really good idea to create a monthly budget before you start looking to borrow money. Drafting a budget might actually demonstrate that you don’t need to borrow at all. However, if you do need a loan, it’s important that you check your future commitments first – both financial and social. If you have a big birthday celebration planned, or even something boring like a car service, these can impact your usual budget and if not considered, can cause you to miss payments. Don’t just think about your current spending or your current needs, think about what you may need to spend your future income on as well.

Step 2: Research different types of credit

Although payday loans serve a wide demographic, they’re not the only type of alternative borrowing available. You could consider one of payday loan alternatives, such as a credit line, a high-interest credit card or even a loan from your credit union, depending on the circumstances requiring you to borrow. Payday loans are straightforward, quick, and finite so you won’t have access to revolving credit if you only need to borrow once. But if your cashflow issue isn’t a one-off or you need to borrow more than a few hundred pounds, you should research the options available to you first, before jumping in at the first loan you think of.

Step 3: Compare payday loans

If you’ve decided a payday loan is your best option, it’s time to start comparing. Using an online loan comparison site takes a few seconds and means you don’t need to do any of the research yourself. Simply enter the amount you need to borrow, how long you want to borrow for, and the broker will show you the potential lenders who could provide you with a loan. At Clear and Fair, we rank our lenders from cheapest to most expensive, so the results are straightforward and clear. Some comparison sites may promote particular lenders so make sure you check the actual repayment amount due and don’t just click on the top link.

Step 4: Submit an honest application

The application process for a payday loan usually takes less than 10 minutes, but it’s important you’re honest and factor in all of your income and expenditure. People often underestimate or overestimate how much they spend which can lead to declined applications, or approved applications which are unaffordable. Check your budget and enter the income and expenditure fields as accurately as possible. Some lenders will conduct an open banking check, as well as affordability and creditworthiness assessments, to verify your financial information and your application may be declined if the figures don’t match. Lenders want to help you when you’re in a spot of financial difficulty, but they must lend responsibly, and they don’t want you to end up in worse position after repaying the loan.

Step 5: Repayments

As part of the application, you will select your repayment dates and frequency. It’s best to align these with your paydays so the automatic collections are successful, but some opt to select the following day instead if they know their salary is paid at irregular times. Most lenders will allow you to make manual repayments towards your loan, as well as your contractual payments so you can settle the loan sooner, but don’t force yourself to repay more than you can afford just to settle the balance. As long as you make your contractual repayments on time, there won’t be any negative information reported to your credit file.

If, on the other hand, you experience something unexpected that requires immediate financial remedy or leaves you without the funds to meet your contractual repayments, contact your lender as soon as possible. The earlier you can tell them that you can’t repay your loan, the more time you have to work with the lender to find a solution. Whether it’s amending the repayment date by a couple of days or arranging a repayment plan, contact your creditor so that they can help you. The worst thing you can do is ignore the repayments altogether: this will lead to missed payments being recorded on your credit file, negatively impacting any future credit applications you might make, and it can also result in late interest or fees being added to your balance.

Final Words

Borrowing money is supposed to be a help, not a hindrance. If you find you are borrowing increasingly often or borrowing to repay other loans, you should contact a free debt advice service. Even if you are a responsible borrower and you use credit sensibly, life doesn’t always respect our good choices and can hand you a rough deal which throws your finances out of balance. Try not to panic (take a day or two to rationalise if you need to) and get in touch with friends, debt advice charities or your lenders directly to discuss the issue and formulate a solution. There are several formal and informal processes available to help you manage debt, but sometimes all it takes is a step back and pastoral support.

Preparation before taking out a loan is just as important as making sure you meet your repayments afterwards. Using a payday loan sensibly could help you manage your money more efficiently, meet unexpected payments and generally reduce the stress that comes with emergency payments and bills.

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