When you are caught unawares by unforeseen expenses while being in a tight spot, you look for a way to get an immediate injection of cash. To begin with, you dip into your savings, and when they fall short, you turn to your friends or family, a safer way than a loan, but you might not be comfortable going cap in hand to them.
Sometimes, you may need slightly higher than you think your friends or parents will be able to lend you. In some cases, they may not be in a situation to back you. As you cannot put off emergencies, you will turn to direct lenders to borrow money.
There are various types of loans that you can use to fund your emergencies, but payday loans are quite popular among borrowers. These are small personal loans aimed at helping you tide over during emergencies. As you are supposed to pay back these loans on your next payday, they are addressed as payday loans.
What makes payday loans so special?
Payday loans come with the fastest disbursal. Although other small loans are also advertised as same-day approval, payday loans are quicker when it comes to getting money in your bank account. Payday loans do not involve a credit check, so it removes the formalities of getting a copy of your credit report from credit reference agencies and checking your credit score, which saves a lot of time.
A lender will analyse your repaying capacity just based on your income statement. As long as you are able to pay back the debt, you are good to go. You are likely to get the money within a couple of hours because it does not include much formality.
Another reason why borrowers prioritise payday loans is that the approval rate of these loans is very high. People with bad credit scores often struggle with getting the nod from lenders. In a case of very poor credit rating, they may face rejections.
You cannot afford to face rejection if you need money to fund emergencies. With payday loans, the chances of refusal become all but zero because the lending decision is made based on your income statement. Therefore, these loans are called 100% acceptance loans.
Although these loans are considered loans with 100% acceptance, it does not mean that you will always get your application approved. If a lender is unsure about your repaying capacity, they might turn you down.
How to get payday loans at lower interest rates
Guaranteed payday loans are extremely convenient to apply for, but they carry high-interest rates. A lender is just making a decision based on your repaying capacity, assuming that your credit score is not up to scratch. As a result, they will consider you a borrower with high default risk.
In order to mitigate the risk involved in loaning you, they will charge very high-interest rates. You can avoid bearing high-interest rates if you follow the following tips:
- Make your repaying capacity stronger
Your income statement plays a paramount role in getting approval for payday loans. As your credit report is not so impressive, you can make a lender believe that you are not a highly risky borrower by having a very strong repaying capacity.
You should try to improve your income. In addition, to have a full-time job, you can also show your other income sources like rental income, dividend or interest income. Such passive income sources will make it possible for you to get money at lower interest rates.
If a lender is confident about your repaying capacity, they will be less likely to charge you high-interest rates.
- Borrow less money
Payday loans cannot go beyond £1,000. In most cases, they do not go beyond £700. It means the amount lent by payday lenders is very small. Though a payday lender can offer up to £1,000, you should still try to borrow a smaller sum.
This is because payday loans are repaid in full, so it can be challenging for you to repay this much money along with interest within a span of 14 days. Even if you get the approval, you will wind up in rollover. As a result, the cost of the debt will continue to rise, and in the end, you will fall into debt.
Borrow as little amount of money as possible. The lower the sum, the less risky you will be perceived. Use an online calculator to get an idea of the estimated cost so you do not borrow more than your affordability. A rule of thumb says you should not borrow more than you need.
- Choose an extended repayment period
Different types of lenders provide payday loans, and each of them uses different policies and terms and conditions. While some payday lenders accept money in a lump sum, others accept these loans in instalments.
Try to choose a lender that offers these loans with an instalment repayment plan. This will make the debt more affordable. Payday loans are generally not expensive because of interest rates but because of a lump sum payment within a period of 14 days.
When you are to repay the debt in instalments – weekly or monthly – you will be able to manage it smoothly, with lower chances of falling behind payments.
The final word
Payday loans are the most convenient source of funding. They are the perfect solution for financing your emergency expenses, but they carry high-interest rates. You should carefully examine your repaying capacity so you do not end up in debt.
As these loans are paid off in a lump sum, it can be difficult to keep up with payments, so try to choose a lender that allows you to clear the dues in instalments. Use these loans only when you need them and for emergency purposes.
It is always advisable to create a budget to stow away money for a rainy day consistently. This lowers your reliance on debt when emergency crops up.
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.
