Why have payday loans become so popular?
Despite having suffered some bad press in the past, payday loans are still a popular option for people who need access to quick cash. Research suggests that they are particularly popular with younger borrowers. There are many reasons why people take out short-term loans, which we will look at below, as well as the advantages and disadvantages of payday loans when compared with other types of credit.
How much do you need today?
For how long?
based on the last working day of each month
Who takes out payday loans?
According to the most recent Competition and Markets Authority (CMA) report on payday loans, payday loans are a popular source of fast cash. Some 83 per cent of payday loan customers, who are most likely to be between the ages of 25 and 30 and employed, found their loans online.
Payday loans went through their most popular stage in the years following the global economic crisis, with people regularly turning to short-term high-cost credit as a way to meet general daily costs. Between 2008 and 2012 the number of payday loans being taken out rose significantly, growing to 10.2 million payday loans being issued in 2012, with a value of £2.8 billion.
2012 was the peak of the demand for payday loans, but soon after this, more and more cases and examples of poor lending practices started finding their way into newspapers and consumer-focused TV. Around 40 per cent of payday loan customers had several loans out at one time in 2012, which can lead to major financial problems for borrowers. A number of payday loan providers stopped operating over the following two years.
In 2015, however, the Financial Conduct Authority (FCA) stepped in to make the regulation of the industry far stricter. This actually had a positive impact on the demand for payday loans once more, as consumers realised that they could now borrow from providers practicing responsible lending. Caps were also introduced to limit the financial penalties and interest charges a borrower could incur as a result of taking out a payday loan.
Interest rates were capped at 0.8 per cent of the value of the loan per day, while total borrowing costs were capped at double the loan amount, even for those who missed payments.
What are the advantages of payday loans?
- Tight FCA regulation
In recent years, the FCA has stepped up its regulation of the payday loans industry significantly. it is now more strictly regulated, in terms of caps on interest and penalties, than many other forms of credit.
- Money available quickly
Most people that take out payday loans need the money quickly. When taking out personal loans with banks, or opening credit card accounts, for example, you may have to wait days or even weeks for the card or money to come through to you. With an online payday loan, the money is often in your bank account on the same day that you apply.
However, if your application doesn’t quite meet the eligibility criteria, the lender may request that you send in extra information, or you may need to speak to the lender on the phone to clarify certain things. In these situations, you may not receive the money as quickly as expected. The speed with which you receive the payments is also somewhat dependent on the type of bank account you have.
- Consumers have plenty of choice between providers
Once you know that a payday loan is probably the right kind of credit for you, you can start researching the industry and looking online for the right lender. There is a great number of both traditional payday lenders and instalment loan providers in the market, all offering slightly different products and terms. The industry is highly competitive, so offering a good deal helps lenders attract business. If you can use this to your advantage and ensure you check lenders’ terms and conditions before applying, you are likely to maximise your chances of getting a good deal on your short-term loan.
- They can be used for anything
Although many payday lenders will ask what your loan is for, at the point you apply, you can borrow money through a short-term lender for most reasons. The amount of cash available through payday loans is relatively low, which also helps to keep the level of debt under control, providing you repay on time.
- You can now pay them back over instalments
Before the FCA stepped up its control over the industry, payday lenders would almost always insist on full repayment of the amount borrowed on, or just after, the borrower’s next payday. As a result, a large number of borrowers found themselves short of money month after month, which was leading to multiple loans for lots of customers.
The media was highly critical of these practices and, as a result, a new kind of payday loans has emerged, known as an instalment loan. Here at Moneyboat, we offer loans that are repayable over a flexible number of monthly instalments, ranging from two to six. Our customers can use our online loan calculator to help them work out how many instalments would work best for them, in terms of being able to afford the repayments. They will then be offered the loan on terms that depend on the outcome of their credit and affordability checks.
What are the disadvantages of payday loans?
- Interest rates can be high
Compared with some other forms of credit, such as longer-term personal loans, secured loans and arranged overdrafts, payday loans are an expensive form of credit. Interest rates are capped at 0.8 per cent of the value of the loan each day, but this is still high. The actual rate of interest charged will depend on the lender’s policies and your credit and affordability assessment.
- They can lead to a debt spiral
Because some payday lenders still require the entire value of the loan to be repaid on the next payday, borrowers can still find themselves in a spiral of debt once they start using payday loans. If you borrow £200 one month because you have run out of money, but then have to repay that amount the following month, you may find yourself short of money once more.
Short-term loans are intended for use to meet emergency costs and fix temporary holes in your finances, not as a long-term solution for your financial problems.
- Instalment loans can mean more interest to pay
Although instalment loans can offer a more affordable repayment option for many borrowers, you need to bear in mind that the longer you take to pay off a loan of any kind, the more you generally end up paying in interest charges. Ideally, you’ll find a balance between paying the loan off as quickly as you can, while ensuring you can afford the repayments you’re committing to.
Should I consider payday loan alternatives?
It’s always advisable to look at all your options when considering what type of credit is right for you. If you are in need of money quickly, there are a few alternatives to payday loans that are certainly worth looking into before you start applying online.
Payday loans alternatives
- Borrowing from loved ones
This is, perhaps, the ideal solution to a financial emergency and the option least likely to result in further money problems. You may be surprised how willing family and friends are to help you out, particularly if you have recently been made redundant or have seen your outgoings increase significantly or unexpectedly.
- Credit cards
Credit cards can represent a good value borrowing option, particularly if you qualify for a low-interest, or interest-free period. Make sure you pay off your balance within the designated period of time, however, or you may see your interest rate soaring to a much higher level.
This solution can give you access to funds very quickly – usually within 24 hours – providing you meet lending criteria. It’s important not to go over your arranged limit, as this can result in penalties that are among the most expensive in the entire credit market.
- Social lending
For those who are struggling to be accepted by standard lenders, social lenders might be able to step in. Organisations such as Credit Unions can offer financing to members of the public on good terms.
- Peer-to-peer lending
This is a relatively new form of borrowing, but one to consider nonetheless. Peer-to-peer online lending platforms match together people that are looking for funding with investors who want to lend. Loans are usually funded by a number of investors and can offer good terms and rates, but you will usually have to meet strict lending criteria to qualify.
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Warning: Late repayments can cause you serious money problems. For help, go to moneyadviceservice.org.uk
Representative Example: Borrow £400 for 4 months, four monthly repayments of £197.48. Total repayment £597.48, interest rate p.a. (fixed) 255.5%. Representative APR 939.5%. Compare Moneyboat loans.
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