Payday loans have become an increasingly popular choice to cover unexpected costs, make urgent payments and tide borrowers over in the short term.
While they are convenient, taking out a short-term loan might not always be an ideal solution, depending on your personal circumstances.
What is a payday loan?
Payday loans are a form of short-term borrowing designed to be repaid in under a month – or when the borrower is next paid. They can help deal with bills and other sudden expenses that may crop up if your wages can’t cover them. The money is paid directly into the borrower’s bank account to be spent as needed and is then repaid in the following weeks, rather than months or years, with interest.
What are the advantages of a payday loan?
The biggest advantage to payday loans is the quick and convenient access they offer. You can apply quickly online for a payday loan. Processing is fast – within minutes of being accepted for a loan, the money lands in your bank account. This is beneficial to those who find themselves in a tight situation and need to make an urgent payment.
There are also a wide variety of loan products available to borrowers. New FCA regulations offer better protection to consumers. Those regulations require that the cost of payday loans is capped by law - limiting the amount of fees and interest which can be charged.
Why are payday loans bad?
The obvious danger of payday loans is that they can be incredibly expensive to pay off. Borrowers may end up paying more back than they would on other types of loans.
Another risk of short-term borrowing is the way it may impact your finances from one month to the next. Some loans offer a period of up to three months’ repayment, but others may require repayment in full the next time you receive your wages. These time constraints can be difficult on borrowers, as planning other monthly expenses around loan repayments could prove tricky.
Another reason why this type of loan could be considered a bad choice for some is CPA (Continuous Payment Authority). Some short-term lenders ask customers for CPA before approving a loan. This means that the lender has access to take payments from your bank account up to the amount it chooses subject to there being sufficient funds in the account. Reputable lenders, authorised by the Financial Conduct Authority, will always obtain your approval prior to taking any payments from your bank account.
This can lead to additional bank charges that the borrower had not planned for, which may worsen their situation.
Should I get a payday loan?
Whether you should apply for a payday loan depends on your financial situation. If you are hit with an unexpected bill a few days from your next wage and can find a payday loan that won’t affect you at a high rate when repaying, it may be a reasonable solution.
However, although they’re becoming an increasingly popular choice for people dealing with unplanned bills, payday loans can end up more expensive in the long run due to high interest rates and extra fees, meaning they might not always be the best choice. Before you take out any type of loan, you need to be sure you can afford to make the repayment in full when it’s due.
Those who are struggling with their finances can seek free help and advice from organisations such as Step Change. This organisation offers its services to assist you through your financial situation, providing advice on how to take control of your debts and create a personal budget.
Applying for a payday loan
If you do decide to apply for a payday loan, it’s important to consider the following:
- Make sure you only borrow what you need. While the maximum sum the lender can offer may seem appealing, if you don’t need it, then it’s not worth the high repayments.
- Take time to shop around. Before you apply, work out if it’s right for you. All lenders will offer different cost charges and product features on their repayment plan, and one may be more beneficial for your circumstances than another.
- Pick your lender carefully. While most adhere to the regulations set by the FCA, some have unfortunately not yet followed suit. You’ll be able to find out if a lender is FCA-regulated by taking a quick scan of their website.
Find out more about the different types of lenders and discover our inside knowledge on all things loans.