Payday loans are small emergency loans aimed at helping you tide over when your savings fall short of cash to meet unforeseen expenses. These loans seem to be the perfect choice when you need money urgently. You can get money without further ado directly in your bank account and getting rid of them by paying the full payment outright.
Though these loans seem to be more affordable than any other loan option, millions of people find them very hard to deal with. The repayment length of these loans is 14 days, but people find them stuck in them. The harder they try to get out of it, the deeper they find themselves.
Online lenders generally provide payday loans because they are aimed at bad credit borrowers. When your credit rating is not good at all, no bank will lend you money, and this gives an advantage to private lenders to make money.
Payday loans seem to be very affordable, but they are actually not. You cannot just make a decision based on superficial factors. The devil is in the detail.
Reasons why payday loans can throw you into a debt trap
Here are the reasons why payday loans could throw you into a debt trap:
- High-interest rates
If your credit report is not stellar and you have come across some emergency, you will undoubtedly rush to private lenders when banks have closed their doors. A general rule is that a lender will run a credit check to ensure your repaying capacity, but lenders do not check your credit report when approving payday loans.
As you already have a bad credit rating, you are assumed to be highly likely to commit a default on a due date. To mitigate the risk, lenders charge higher interest rates. Payday loans carry even higher interest rates than bad credit loans as they do not involve a credit check. Therefore, these loans are also called no credit check loans.
Lenders usually make a lending decision based on your repaying capacity. As long as you can repay the debt, they will sign off on loan. The APR for payday loans could go up to 500%. It means if you have borrowed £100 and you roll over the debt for the whole year, you will end up paying up to £500, meaning five times the borrowed amount.
- Repeat cycle of debt
One of the drawbacks of payday loans is that you are to pay back the money in a lump sum on the due date. You will have to roll over the loan for another 14 days if you cannot pay it off. It means you will now pay the interest double and late payment fees.
Even if you wish to pay it off a week after the due date, you are not allowed to do so. It is not surprising to be unable to clear dues on the due date even if you are just to pay back £115 (£100+£15). It is essential to understand that debt is an additional expense.
Your budget, including your savings, did not have a scope for meeting an unexpected expense worth £100. How would you be able to manage the payment of £115 from your pocket? This is why you keep rolling over the debt, which adds up to a debt trap.
- Outlandish claims
Some payday lenders advertise their loans as 100% acceptance payday loans in the UK. It is worth noting that no loan with 100% acceptance exists. Even though payday loans are signed off on without a credit check, a lender is responsible for perusing your repaying capacity.
No lender can make such a claim that you will get approval 100% as they are yet to peruse your income statement. Though payday loans are expensive, FCA has capped interest rates at 0.8% per day. No lender is allowed to charge more than that.
Some payday loan sharks try to bait bad credit borrowers with claims like 100% acceptance of extortion money. You are responsible for ensuring that you do proper research and do not fall prey to such payday companies.
How can you avoid falling into the payday loan trap?
Payday loans are not completely bad. You just need to be careful at the time of applying for these loans. Here are some suggestions you should strictly follow to avoid falling into a payday trap.
You should take out payday loans only when there is n emergency. Not having enough savings for shopping for apparel is not an emergency. Using these loans to buy a tumble dryer is also not wise, as you can use a cloth line to hang clothes to dry. However, if you need to get repaired a laptop you use for office work, they could be an ideal funding source.
Do proper research before applying for these loans. Some payday companies flout the interest rate cap by the FCA. Borrow money only from those lenders that do not charge more than 0.8% per day.
Make sure that you do not have any other debt at the time of taking out these loans. Otherwise, it will be challenging to manage both loans. If you already have some unpaid loans, you should consider clearing them first. Debt consolidation loans for bad credit with no guarantor can help get rid of those debts at once, and then you will have only one large personal loan to pay down over an extended period of months.
The final comment
Payday loans are undoubtedly expensive, but with proper research, you can find a payday lender that lends money at affordable interest rates. Never believe in outlandish claims such as 100% approval or 100% guarantee, or 100% credit score improvement.
Payday loans can take a toll on your credit rating if you make a default, but it will not help improve your credit score despite making timely payments. If you are on guard at the time of borrowing money, you can avoid falling into a payday debt trap.
Jessica Rodz is the Senior Content Writer at Cashfacts. She has a long career in the field of content writing and editing. Jessica has the expertise in the UK lending marketplace where she has worked with 7 different lending organisations and acquired many responsibilities from preparing loan deals and writing blogs for their websites.
At Cashfacts, Jessica is managing a team of experienced loan experts and doing a major contribution in guiding the loan seekers via well-researched blogs. She has done graduation in Business (Finance) and now currently doing research papers on the UK financial sector.
