According to a recent study, more than 14 million people in Britain have suffered a significant loss of income in the previous year.
The majority of these people had insufficient safety nets. Whether in the form of savings, credit, or benefits, nothing could cushion them from the shock.
Several factors are contributing to a high rate of financial instability these days. Changes in the job market, rising housing costs, and wages that are not keeping up with inflation all contribute.
Workers are experiencing job loss or job transitions with gaps in employment.
Many workers are relying increasingly on unpredictable zero-hour contract jobs as their main source of income.
Many find that their savings or unemployment benefits are not enough to keep them afloat after a sudden drop in income, and they turn to credit as a financial coping strategy, or a payday loan.
Why Turn To A PayDay Loan?
It has been found that individuals who experience multiple setbacks are the most likely to rely on credit. However if you have poor credit ratings or no credit score, they are likely to be rejected by conventional lenders. The idea of taking out a Payday loan is becoming increasingly popular in the UK because they offer a quick solution for customers who are in immediate need.
What Is A Payday Loan?
A payday loan, also known as a short-term loan, cash-advance loan or an instalment loan, is a type of credit that fills a gap in the financial market.
These loans provide fast cash to customers who lack credit or may not qualify for conventional loans.
Payday loans are for relatively small sums, typically up to £800 for a period of a few weeks to 6 months. The loan period is designed to cover an emergency until the borrower gets his or her next pay cheque.
Lenders charge a high interest rate on this type of loan, sometimes upwards of 1000% APR, and borrowers will incur additional charges if they are not able to pay on time.
However, customers may find the interest and fees worth paying in order to get a quick loan in a time of need.
The average amount of a payday loan in the UK is £260 with an average length of 22 days, and half of all payday loans are less than £200.
How Does A Payday Loan Work?
A payday loan begins with an application, usually available online, which may or may not include a credit check. Lenders will need some assurance that the borrower can repay the loan even if he or she has poor credit.
This typically entails, at minimum, a bank account and evidence of a monthly income. An application may also request information about the borrower’s employment and expenses, such as rent or mortgage payments, utilities or number of dependents.
The borrower will also need to supply British bank account information in order to receive the loan.
Once a payday loan has been approved, the funds are typically deposited into the borrower’s account the same day.
How Are Payday Loans Repaid?
Payday lenders generally require that a loan be repaid within one month, but some companies like MoneyBoat offer installment plans over a longer period of time.
Some lenders require debit access to the borrower’s bank account or a post-dated check and automatically deduct the repayment from the account (or cash the check) when the loan is due.
Others allow the borrower to initiate a payment. If the borrower is not able to repay the loan on time, most lenders are willing to extend the payment period in order to avoid going to court.
However rolling over a loan is uncommon today, as the interest continues to accrue, making the option an expensive one.
Who Uses Payday Loans The Most?
Payday loans are most commonly used by people who are looking for an emergency solution to get back on their feet – quick!
They use this financial bridge as a springboard for new and prosperous opportunities in their life ahead, and can focus on better financial planning, earning options and responsible spending.
When Are Payday Loans Beneficial?
Payday loans can be an effective solution in case of an emergency. For example, a broken-down car can keep an employee from getting to work, putting their job at risk. Thus, a short term loan to cover a £200 repair can make a world of difference in that employee’s life.
A medical emergency is another circumstance when payday loans can be well worth the higher interest rates. Some people nowadays are also using payday loans for one-time expenses that they don’t have time to save up for. For example an emergency airline ticket for a journey that can not wait.
The good thing is, a payday loan doesn’t require a long wait for approval.
Consumers could take advantage of an opportunity and possibly save more money than they will pay in interest.
What Are The Risks Of Payday Loans?
Borrowers who are not able to repay a short-term loan by its due date run the risk of falling into serious debt. If a loan is rolled over, the high interest rates can exceed the amount of the original loan.
The borrower may be liable for late payment fees and bounced check fees as well, all of which add up. Moreover, many borrowers take out new payday loans to pay off current loans, which traps them in a cycle of debt that can have long-term consequences to their credit score and financial well-being.
Failure to repay a loan could ultimately lead to a court-ordered garnishment of wages or other legal penalty.
What Are Alternatives To Payday Loans?
Before turning to a payday loan to pay off a debt try negotiating a payment plan with the creditor first. Alternatively, simply ask for additional time to pay the bill.
Although most businesses don’t advertise this kind of flexibility, many will provide it when asked.
They would rather receive a late payment than send the invoice to a collection agency. Though creditors could charge a late fee, that fee will likely be less than the cost of a short-term loan.
Other options may include asking an employer for an advance.
You could also choose to charge an expense to a credit card, or take a cash advance from a credit card.
Borrowing from a friend or relative is also an alternative to consider. If none of those options are viable, a payday loan may be the best choice. Borrowing money for true emergencies only is the best advice a consumer can get. It’s also best to borrow no more money than you can pay back when you receive your next paycheck.
To prevent accruing interest on your loan, remember to repay the payday loan before paying other expenses.
What Should A Borrower Look For In A Payday Lender?
Payday loans are not an ideal solution to all financial problems. They may however be the best way to deal with an urgent need for funds.
Not all payday lenders operate the same way, so before making an application, find out about the lender’s reputation and policies.
Interest Rates: Although payday loan interest rates are generally high, some lenders charge lower interest rates than others. With some charging on average more than 1500% APR and some, like MoneyBoat, charging as little as 939.5%.
Payment Plans: Some companies are more flexible in terms of the payment plans they offer. MoneyBoat, for example, offers short term installment plans over several months.
Credit Checks: Some lenders promise not to do credit checks. The more responsible lenders like MoneyBoat will check a borrower’s credit to assess their ability to afford the loan. This is for the benefit of the borrower and prevents them from getting into further financial difficulties.
Full Disclosure: Always read the terms of a lending agreement. This is to make sure that there is a clear explanation of the interest rate and any other fees. Once approved for a loan, there should be no hidden costs or other surprises.
Payday loans can be a good short-term solution for borrowers who are unable to get conventional loans. It’s also useful for people who need money right away.
Borrowers should be aware of the risks. Make sure you’re not taking on debt that you will not be able to repay.
Check that your lender is FCA approved like MoneyBoat, for a more secure and reliable option. MoneyBoat understands that anyone can have financial problems.
We therefore endeavour to work with our customers to solve those problems without creating new ones.