Payday loans are a common type of borrowing for people who have trouble managing their cash flow. They deal in short term loans. They allow you to take out a short-term loan and pay it back on the next payday. You can find short term payday loans online, an online payday loan, but not exclusively.
Payday loan lenders often have extremely high interest rates, and people who use them as a way to save money for emergencies often struggle to pay them back.
We’ll go through a few of the most prevalent misconceptions surrounding payday loans, as well as the facts behind the cash loans.
1. Payday Loans are a harmless way to tide me over until payday
A common and reasonable misunderstanding about these loans is that they are an unproblematic way of getting cash until your next paycheck because of the name. They are often an alternative to personal loans. They are short term loans that offer payment direct to an active bank account.
Lenders prey on this common perception. Payday loans tend to advertise their products in a more amicable way, making sure not to be too forceful about the financial obligations of their loans.
In contrast to banks and other lenders who focus on larger loans, payday lenders specialize in smaller loans; the kind of money you might borrow from a friend or family member.
The truth is that these loans may be quite harmful. While smaller amounts are involved, this is due to the fact that typical borrowers tend to be people who are so desperate they’re prepared to take out a loan for a low amount, while interest rates can be extremely high. Late repayment can cause you serious money problems and a bad credit score.
2. I can use payday loans as an emergency savings account
Financial emergencies occur for a variety of reasons. Maybe you’ve had your shifts curtailed at work, received a penalty, or been confronted with an unanticipated expense. You can also get instant payday loans in your bank account. They act as an emergency cash supply.
People with savings are able to rely on a financial buffer that allows them to handle unexpected costs. On the other hand, people without savings are only one bad story away from debt.
Most payday loans prey on People who are in a tough spot and need money quickly are usually the type of people who lenders target. It’s easy to see why someone would want to take out one of these loans – they offer a quick fix for a short-term problem. The issue with using these loans as an emergency savings account is that it can cause problems down the road.
Although it might seem beneficial to have access to quick cash, there is a downside to payday loans. The interest rate for these loans is 1500%, as opposed to the 22.8% APR that comes with a typical credit card. People who don’t have savings account are at risk of being penalized with more charges from late payments, which could cause them fall into debt and borrowing even more money from direct payday loans — creating a dangerous cycle.
3. Payday lenders are just as trustworthy as banks and building societies
The general public commonly perceive financial institutions, such as banks and credit unions, to be reliable and credible. When people borrow money from these sources, they expect to receive a certain level of expertise and customer service.
The misconception that payday lenders are banks or similar institutions is one of the most common. People compare them to other high-street lenders because they provide loans, in the same way as a mortgage lender or bank would.
In contrast to most responsible lenders, payday lenders don’t perform a credit check or consider your trustworthiness to repay what you owe. They are less stringent in their lending criteria for loan applications. Lenders use this lack of concern for your credit score as a marketing technique.
Payday loans are given to anyone and everyone, regardless of credit and affordability checks. And while that might seem like it’s beneficial, it actually creates a more vulnerable group of people who attract the attention of lenders looking to take advantage. This makes is easier for them to sway those in already difficult financial situations.
4. As long as I pay it in full, a payday loan can’t hurt me
Your financial profile won’t be impacted as long as you repay what you owe on time and in full, whether it’s making your mortgage payment or settling your credit card bill.
Borrowing money and paying it back quickly can actually improve your credit score. It helps you establish a good payment history, which credit reference agencies will consider when assessing your credit rating.
In the past, payday loans were not much different from any other type of loan. Although the interest can be very high, as long as you pay back what you borrowed plus any additional fees, a loan would not have a negative impact on your financial future.
Although this wasn’t the case in the past, as Mortgageable and various other sources report, mortgage lenders’ current stance on payday loans is stricter. Even if you’ve fully repaid a loan, having had one in the first place will now make it harder to get approved for a mortgage.
It’s a myth to believe that payday loans will not harm your credit in the eyes of lenders, given that big mortgage providers like Habito and London & Country now refuse applications from anybody with a payday loan less than two years old.
5. I can settle my payday loan debt at a time that suits me
Payday loans were designed to be used as a short-term solution, allowing you to borrow an amount until payday and then repay the total amount borrowed.
Since then, the model has evolved somewhat, and certain businesses provide borrowers greater choice. Some lenders enable individuals to pick the repayment period, so you might repay your debt in seven days or seven weeks depending on what feels right for you.
A CPA is a loan term that extends beyond the agreed-upon payback period. While it might appear to give you greater control over your repayment schedule, this isn’t the case — and it’s due to something called a Continuous Payment Authority (CPA). Many loan agreement include a CPA. Simply said, you’re giving the payday lender permission to access your bank account by signing the contract.
This allows the lender to take recurring payments directly from your account. They can do this whether you planned for it or not, and it’s difficult to cancel if you don’t have the cash. This ultimately decreases your control over when you’ll be able to pay off your payday loan.
If you feel like you have to apply for payday loans online, make sure they are regulated by the financial conduct authority and find payday loan companies who offer the lowest rate of interest. There may also be a payday loan alternative. Always remember, not late repayment can cause serious money problems.
If you are experiencing financial difficulty please don’t hesitate to contact us for free debt advice on 0800 169 1536 or leave an enquiry on our website.
Another payday loan article on our website here.
Citizens Advice on payday loans here.
