The demand for payday loans is on the rise, and one of the factors that contributes the most to this growing financial trend is the rise in the cost of living in the UK. With inflation figures seeing an upswing, it is only natural that those with limited financial resources need to find other alternatives to make ends meet. With a hike in living expenses, it is getting tougher by the day for the average person to budget and keep money aside in the till for an emergency. So when is it OK to get a loan, or has the recent press put you off?
We have seen a lot of negative press in the news of late concerning payday loans, and articles are mixed in their opinions and guides. This article looks at a simple approach – what payday loans are, when we should avoid them, when we should use them, and what to watch out for. No fuss, no jargon – easy talking and unbiased.
What’s already out there
There is a lot of advice on the internet about gaining quick and easy financial help. Getting a loan processed by a bank is a long term process with a great deal of documentation and official formalities to be met. As a consequence, quite a few individuals are patronising the next best alternative which are short term or payday loans.
…What about the bad press?
The FCA has recently introduced more stringent policies and measures to safeguard the interests of borrowers and this makes them the best option for many. This comes after negative press on the payday loan industry. Payday loans increasing popularity can be seen in the increasing numbers of individuals who are signing up to apply for loans. This can be witnessed by the customer bases of leading companies like the wonga.com brand which has over 7 million customers – with more signing up daily.
…What about the high interest?
The rates of interest may be on the higher side but this is within government knowledge with the FCA recently capping the rates. The reason for higher interest rates is loan companies carry an increased default risk in comparison to standard financial institutions. Before signing up a respondent must read the agreement thoroughly and understand it. All the charges and fees must be offered upfront by the company and its dealings transparent.
Payday loans benefit those who have low credit scores and find it difficult to obtain a loan from a bank on account of their credit rating. The reason why payday loans are willing to lend to borrowers with unattractive credit ratings is that the loan amount generally is small and loan companies have a built-in risk margin to cover any applicants who might default. The actual amount that an applicant can borrow varies from one company to another. It is generally calculated on the income of the applicant with the company setting a max amount that the borrower qualifies for.
Also, screening procedures differs among companies with some checking credit ratings and other foregoing the exercise. The loan company’s primary concern is that the borrower should be permanently employed and will have to provide proof of employment.
Signing up for the process:
➢ Before selecting a company, a borrower must do a bit of research to find the most suitable company and compare interest rates and payback policies.
➢ A good company will offer all the details on its website and answer any queries a prospective borrower might have. An agreement is signed which states that those individuals who declare bankruptcy the debt is written off and also contains a clause where the borrower cannot sue the company.
➢ It is essential to check for the APR and total charges applicable at the time of repayment. All the information required should be available online at their website.
➢ A borrower must adhere to the payment schedule strictly to avoid incurring any penalty charges.
➢ It is very important to be aware of any rollover payment setups (if setup). They could get really expensive if they are debited directly to your linked bank account.
➢ The most important thing for a borrower to remember is that these are only to be used in case of a genuine financial emergency. They should only be resorted to if all other avenues of accessing money are exhausted. Explore various options before deciding to settle for a loan.
➢ Also the borrower has to realise not to borrow a sum which would not be possible to repay comfortably at the time he receives his next pay cheque. Defaulting on payments could lead to serious expenses.
Payday loans are a big help if used carefully, when obtaining finances from other sources are hard to come by. All it requires is planning and repaying it on time – keep a steady financial head and making good decisions is the key here.
Author bio: The writer has been working with several financial advisories and in this capacity has advised numerous individuals in personal financial management and improving credit scores.