Payday loans are small short-term cash advances designed to help people cope with urgent expenses. This type of loan is unsecured, and it comes with steep interest rates. Payday loans are easy to get, and they can be paid off with the next salary, although, some lenders offer more flexible payment terms. Usually, Payday loans range between £50 to £1,000 with an APR of 1,500%. Most lenders take out their payment by direct debit, so it is much safer to have enough funds in place, as defaulting on loan payments can attract unfavourable charges.
Who is eligible to get a payday loan?
Borrowers have to be 18 or above and have a steady means of income to apply for a payday loan. Usually, lenders will look into the borrower’s credit history and other financial information before their application can be approved. Low credit scores can affect one’s chances of getting a payday loan, however, some lenders can still approve a payday loan application even with bad credit. Lenders in this category charge more interest fees.
Do payday loans affect credit score?
Payday loans will not affect a borrower’s credit score if they pay in time. However, some lenders see Expert Payday Loans borrowers as unreliable customers, hence, a payday loan might have a negative effect on one’s credit history.
Also, each lender or credit reference company calculate credit scores using their criteria, so the way a payday loan will affect the borrower’s score depends on the organization reviewing their history. Some lenders believe payday customers are not usually in dire need of a loan, while some do not differentiate between a payday loan and other types of loans.
Payday loans – what are the risks?
Payday loans come with higher interest; hence, the borrower is very much at risk of running into debt. Also, since charges apply when loans are not paid on time or in full, there is a high risk of getting trapped in a cycle of debt. Fees charged for late payments are capped at £15 (plus interest on the amount borrowed) by the Financial Conduct Authority.
Payday loans interests are calculated as a percentage of the amount borrowed and it is usually charged daily. This means the larger the amount loaned, and the longer the payment is delayed, the more interest it attracts.
What to consider when getting a Payday loan
Payday loans should not be taken unless one is in dire need. Also, borrowers must be certain they can afford to pay back in due time before they venture into taking this type of loan. Considering the high rates and charges involved, it is almost always a bad idea to take a payday loan. A better alternative to taking this type of loan is to borrow from a friend or family or opt for a cheaper form of credit.
Borrowers should also stir away form a payday loan if they are planning to apply for an important credit application in the near future. As earlier stated, some companies view payday customers as unreliable, therefore, will not consider approving any loan application from them. It is also not uncommon for Mortgage providers to rule out payday customers when trying to determine their affordability.
Most importantly, borrowers are advised to thoroughly read the terms and conditions of a loan, maintain a budget, and ensure they have enough funds in their account to prevent defaulting which could lead to extra charges.
How to Withdraw a Payday Loan Agreement
It is not uncommon for borrowers to change their minds after taking a payday loan. As long as the decision to withdraw a payday loan is made within the “cooling off” period, which is 14 days after taking the loan, borrowers are allowed to change their minds without having to pay extra charges. They will be required to pay off their loans and interest.
What to do when one has difficulty in paying off a payday loan.
Navigating debt incurred by payday loans can be tasking. Borrowers can get advice from a free financial expert or contact a debt charity such National Debt Line. These organisations can offer guidance and suggest a way out such as an IVA or DMP.
How to consolidate Payday loans
To simplify repayments and reduce interest rates, borrowers can consolidate their loans. This simply means transferring debts from multiple accounts to only one account with a lower interest rate. This solution may not be able to solve every borrower’s problems and creating more credit account can lower credit score.
How to avoid Payday loans
Managing expenses and debts can often be daunting. Some of the ways to avoid taking unsecured credits such as payday loans include adhering to a strict budget, proper financial planning, or borrowing from friend or family.