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Payday Loan: Unveiling the Realities

June 25, 2024 Financial Tips

When faced with unexpected financial emergencies, the allure of quick cash / quick loans / payday loan can be tempting. Payday loans can seem like a lifeline for people in need because they offer quick funding with few requirements. In a number of circumstances, it is. Using short-term loans incorrectly can lead to a cycle of debt, giving them a bad reputation.

The Payday Loan conundrum

In a perfect world, financial curveballs wouldn’t exist, and we’d have ample savings to weather any storm. Unfortunately, life’s changes often catches us off-guard, leaving us scrambling for solutions.

For those without access to traditional credit or emergency funds, payday loans are a quick fix. These small, short term loans, typically ranging from £100 to £1,000. Lenders design them to help borrowers until they receive their next paycheque.

The allure of instant access

The appeal of payday loans lies in their accessibility and speed. Unlike traditional personal loans, which often can take a few days for a decision. Payday lenders offer a streamlined online approach. Most lenders can provide you with a decision in moments, cash in your bank the same day.

 The FCA has made rules stricter for lenders who offer payday loans in recent years. Applications ask a lot more questions, along with stricter checks. The application forms now ask for more information than that of an unsecured loan.

 Despite stricter regulations, payday loans are still a quick option for people in need of urgent financial assistance.

The cost of convenience

While the convenience of payday loans is extremely helpful, it comes at a price. These loans, on the surface, appear to have exorbitant interest rates. However the FCA has sticker rules as to the %APR a lender can charge.

However the APR for short term loans may appear excessive, they are only for a few months. Where as APR reflects the cost over a year. 

For instance, a £300 loan with a £45 fee due in two weeks equates to an APR of a staggering 391%. In contrast, the average credit card APR in the UK hovers around 25%. The difference may look excessive, how it doesn’t show a true reflection.

If you borrowed £300 on a credit card, you can repay over a number of years. A payday loan is a short term option with a fixed amount to repay. Each month, the credit card charges interest on the balance.

The Debt Trap – a Vicious Cycle

Borrowers easily become trapped in a cycle of debt with payday loans, which poses a problem. Because of the short repayment periods and fees. Some borrowers find themselves unable to repay the loan in full when it comes due. This forces them to roll over the loan, incurring additional fees and compounding interest charges.

 The FCA says over half of payday loan borrowers take out a second loan within a year. Borrowing money from multiple loans to pay off old ones can create a cycle of borrowing more and increasing debt.

Lending Practices

Critics say payday loan companies target vulnerable communities and people with limited money, using unfair practices. For regulated lenders, this however is untrue. Strict rules laid out by the FCA require all lenders and credit brokers to adhere to them. We establish these guidelines to protect customers.

Never borrow money from a business that the FCA (Financial Conduct Authority) does not regulate.

The impact on Credit Scores

Payday loans don’t affect credit scores if paid on time, but defaulting can have serious consequences. If a person is unable to repay a payday loan, the loan goes into default. The debtor may then send the debt to a debt management company.

If the borrower does not pay a loan on time, it can appear on their credit report. This can negatively impact their credit score. As a result, it may become more difficult for them to obtain loans in the future.

 However this is standard practice for any loan, not just short term loans.

Alternatives to Payday Loans

Before applying for a payday loan, explore alternative solutions before resorting to these high-cost borrowing options. Here are some ideas:

1. Negotiate with Creditors

If you’re facing financial difficulties, don’t hesitate to communicate openly with your creditors. Lenders and service providers are willing to help if you are honest about your situation. They may offer payment plans, extensions, or temporary relief.

2. Seek Assistance from Non-Profit Organizations

Various non-profit organizations and community groups offer financial counselling, debt management services, and even emergency assistance programs.

3. Tap into Your Support Network

If possible, consider reaching out to trusted friends or family members for a short-term loan or financial assistance. ‘This may be a difficult conversation, it may be more affordable. They may be able to give you longer to pay the amount.

4. Increase Your Income Streams

Exploring additional income sources, even temporarily, can help alleviate financial strain. Consider working part-time, freelancing, or doing gig work to earn additional income and avoid high-cost borrowing. This can help you avoid having to borrow at high costs.

6. Build an emergency fund

While easier said than done, establishing an emergency fund should be a long-term goal for everyone. Saving small amounts regularly can help you build a financial safety net for unexpected expenses. This can reduce the need to rely on payday loans during emergencies.

Regulatory efforts and Consumer Protection

In 2015, the FCA made new rules to limit fees and interest rates. Lenders must now check if borrowers can afford loans before approving them.

 The bottom line

Payday loans offer a temporary solution to financial emergencies. They operate in a strongly regulated industry, with strict controls and measures in place. As long as people use them as a temporary measure, they provide a good temporary financial solution.

Ultimately, you should make the decision to take out a payday loan with a clear understanding of a well-thought-out repayment plan. By exercising caution and seeking guidance from reputable sources. 

 If you do want a payday loan, we are under the FCA, and only work with legitimate lenders that provide a good honest service.


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