Payday Loans - Should They Be Avoided
14th Apr 2024
Payday loans offer a quick solution for short-term financial needs. This type of finance is available both in high street stores but it is perhaps more common to get payday loans online. While they offer easy access to funds, they often come with extremely high interest rates. Before considering a payday loan, it's crucial to explore alternative options and think about the effect that taking out this sort of high interest, short term credit might have on your credit score.
Check Out the Lender Before Applying
Before starting the application process for a payday loan, make sure the company is approved by the Financial Conduct Authority (FCA). Being asked to pay application fees upfront could indicate a potential scam. Valid lenders are listed on the Financial Services Register.
If you are thinking about taking out a payday loan, shop around for the best deal. Online lenders must list their offers on regulated price comparison websites. All good lenders should look at your ability to repay the loan and provide clear information about repayment terms, potential charges, and the implications of late payments. You should also consider whether other forms of finance might be more appropriate for your needs. Payday loans are seen very negatively by credit referencing agencies, as they are typically taken out only by people who cannot access cheaper forms of credit.
Repaying Payday Loans
Taking out a payday loan might impact negatively on your credit score, but failing to pay it back on time will make things even worse. All payday loan adverts must include a warning about the consequences of late repayment. Since January 2015, payday loans are subject to an interest cap and borrowers should never repay more than double the amount borrowed. Even so, this underlines how expensive this form of credit actually is.
Typically, payday loans must be repaid within a month, along with accrued interest. Most payday lenders will ask the borrower to set up a facility to allow the lender to take payments directly from the borrower's bank account. If you can’t make the repayments, or there isn’t enough money in your bank account when the lender tries to take the money, your account will fall into default, and you can expect phone calls from the company you borrowed from.
Alternatives to Payday Loans
Credit unions offer more affordable alternatives to payday loans, and operate in many communities across the UK. If you can agree a short term overdraft with your own bank, this is often cheaper than payday loans too. Many people are struggling with cost of living at the moment, and finding their finances under pressure. Seek advice from debt charities or organisations like Citizens Advice before the situation gets to the stage of needing a payday loan.
Take some time also to understand your credit score and what factors might be influencing it. It might take several months, but taking steps to improve how you are perceived by lenders should give you access to more affordable financial choices in the future.