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Are Payday Loans A Good Idea?

18 October 2022

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Key Points

Payday loans, also known as doorstep loans, can be both a blessing and a curse. They provide an easy method of borrowing money quickly and simply, but they can quite easily spiral out of control and leave you with a huge amount of debt because of the astronomical amounts of interest that are applied to them.

But what are the upsides of payday loans? What are their disadvantages? Why should you be cautious of payday loans? What are the alternative ways to apply for finance if payday loans aren’t an option?  

Let’s take a closer look.

What are the disadvantages of payday loans?

Payday loans have their uses, but this form of lending is definitely not without its problems. If they are not managed effectively, they can, in fact, cause long-term financial hardship rather than solve short-term cash flow issues.

1. Massive APR

Payday loans can be expensive – like, very expensive. To put it into context, an average APR (the amount of interest you pay on top of what you’ve borrowed) on a credit card from a traditional lender might be 39.9% – Prince Edward Island had to impose a rule to keep interest to $25 per $100 borrowed for a period of two weeks. The effective annual interest rate on this is 652%. The amount of added-on interest can easily be more than the original loan, so you can see how easy it is for these types of loans to get out of hand very quickly.

2. Unscrupulous behavior

The payday loan industry has developed a reputation for being predatory. That is, they exploit people’s vulnerabilities and market their products to people who they know can’t realistically afford the repayments. The industry has been more tightly regulated after a number of horror stories, but it’s essential to check the Terms and Conditions thoroughly before signing on the dotted line.

3. It’s very easy to get accumulate debt

Following on from the first point above, thanks to extraordinary interest charges if you start to miss payments then the pay day loan debt can increase very, very quickly. It’s not uncommon for people to take out another loan to pay the first loan, creating a slippery slope of spiralling debt.

4. There’s no positive effect on your credit score

If you are looking at using a payday loan to boost your credit score then you are going to be disappointed. Because there are no credit checks to set up the loan, there is no positive effect when you are paying it back. This is in direct contrast to a traditional loan. 

5. The lenders have access to your bank account

Because you have to enter your bank details in order for the funds to be transferred, the lender has access to your bank account. Some payday lenders have been known to take the money they are owed straight out of their customer’s bank accounts without their expressed permission. The FCA was made aware of this and it is now much less common, but you should always practice vigilance when it comes to giving out your bank details.

Read our guide – Are you considering a pay day loan?

What are the advantages of payday loans?

Payday loans are ideal if you need to access cash quickly. They are usually paid back very quickly rather than over an extended period of time like traditional loans, but if an unexpected bill lands in your mailbox, your washing machine decides to fizzle out and die, or your car gets a puncture and you need to get it repaired in a hurry, then a payday loan could be the solution. 

Here are some of the main advantages of payday loans:

1. Easy to get

This is, perhaps, the most attractive thing about payday loans – they’re incredibly easy to access. Most payday loans now only take an average of 5 minutes to apply for and, once your application is approved, the vast majority of lenders even pay out the same day. This is exactly what users of payday loans are looking for; minimum fuss and cash, quick.

2. They perform limited background checks

It’s a little-known fact that payday loan lenders are far less strict with their acceptance parameters than their traditional loan counterparts. In fact, some lenders don’t do any kind of credit check at all. This is why they are so enticing to people with poor credit histories and lower incomes – because they can circumvent the basic checks that traditional lenders would probably decline them for.

3. Bad credit? No problem

If you have bad credit then applying for a loan via traditional lenders involves more in-depth and convoluted background checks and a higher-than-average chance of being rejected for the credit. Because payday lenders don’t perform these checks, you have more chance of being successful in applying. Remember; payday lenders are after a quick buck, not being drip-fed their profits with monthly payments over a long period of time.

4. No risk to your property

Some traditional lenders want you to secure a loan against your assets (your home, your car) as a security blanket, so if you fail to keep up with your payments they can seize that asset in lieu of payment. Payday lenders do not require such assurances, so you can take out the loan and your property won’t be at risk of being seized.

5. Cooling-off period

Payday loan lenders are required to give you a cooling-off period in case you change your mind. Every payday loan lender will offer a 2-day cooling-off period, meaning you can cancel the agreement within 48 hours of signing up for the loan with no financial repercussions. This is perfect if you don’t need the money after all or find that you can’t really afford to pay it back in the allotted time.

Need debt advice? Speak to Harris & Partners

Payday loans definitely have their place in the market. Used wisely, they can be an effective short-term tool, but all too frequently they lead to uncontrollable debt. If you are concerned because payday loans are causing you to miss regular bill payments and you are being turned down for regular forms of credit then speak to our Insolvency Practitioners. The initial conversation is free, completely confidential, and we could help you escape spiralling debt and get back to financial stability.