Payday loans are seen as a quick and easy financial solution by many people who need urgent money or may be struggling to pay their bills. They seem foolproof, but do you know what are the things to avoid with payday loans? Do you have all the information you need before making a decision to opt for a payday loan? Perhaps you should look into payday loans & cash advances FAQs in order to inform yourself, or you could keep reading to learn the truth about payday loans.
What Are Payday Loans?
A payday loan is an unsecured loan that, like the name suggests, is granted until "payday", or for a term of one month, whether that is actually your payday or not. Since it's an unsecured loan, that means you do not have to pay collateral in order to receive it. However, there are other ways in which the lender secures themselves in case of a repayment default on the borrower's part.
Who Can Use Payday Loans?
Anyone can get payday loans online, as long as they are employed. People from all social and economic backgrounds resort to payday loans for emergencies, when no other better loan options are available. All you need is to have an income that you will supposedly use to repay the loan that you are given.
You can use a payday loan if you're a single mother struggling to make ends meet, if your car just broke down and you need money for the repairs, if you've blown through your entire paycheck in one week and you still need to eat this month, if you need to repay an older debt urgently, etc.
How Do You Repay Payday Loans?
A payday loan is only given out for one month typically, but there are options that allow you to repay it over a slightly longer period, up to 3 months. In a case where the loan repayment period is longer, the lending company will usually also allow you to pay in instalments, in order to make repayment more affordable.
What Are the Advantages of Payday Loans?
- You get the money quickly
One of the main advantages of a payday loan, and the reason why they are so popular, is that they are fairly quick loans. It does not take long to process an application for a payday loan, which means that the applicant can receive their loan even on the same day, depending on processing time. When you find yourself in a pinch and with no other fast options for a loan, quick payday loans can be a lifesaver.
- You can get your loan in cash
Unlike other bigger loans, like secured loans, mortgage loans, etc., instead of waiting to get the money in your bank account and then having to withdraw it, you can get your loan in cash, on the spot. That means there are no added waiting times and you can do whatever you want with the money, without the need of taking it through the bank or having your purchases or transfers registered. What you do with the money is your business, entirely. You can also get the money in a bank account with some loan options.
- No need for collateral or credit check
Because this is an unsecured loan, that means you will not be asked for any type of security, including collateral, a guarantor, or an impeccable credit history. Other loans, especially larger loans, will require more documentation on your part, as well as security. But payday loans for bad credit do not ask for anything, so you just have to apply, and typically, you will also be accepted.
What Are the Drawbacks of Payday Loans?
- The interest rate is very high
Clearly, the biggest drawback is the fact that the interest rate is very high. That makes this loan option an expensive one, and, depending on what you use the money for, one that is not necessarily worth it. While a high interest rate on an unsecured loan is normal and a typical way of "securing" a loan like this, it's still best to avoid getting one, unless you absolutely need to and have no other option. It is also advisable to avoid taking payday loans repeatedly. The good news is that the amount they are allowed to charge you for a payday loan is capped by the Financial Conduct Authority (FCA).
- Small sums of money
Because this is a short-term unsecured loan, the amounts you have access to are not going to be particularly high. Generally, you can expect payday loans to offer between £100 and £1000, with some of them offering more if the repayment term is longer. That's not enough for a large expense, but it is enough for paying bills or a small amount of debt.
- The loan term is short
As mentioned, the loan term is not very long – typically one month, with possibilities for three-month repayment terms. That means you need to be completely sure that your income will be available to repay the loan in one month's time, or have another emergency money source on hand, in case you are not able to repay the loan.
A Final Word of Caution on Payday Loans
The most obvious risk when it comes to payday loans is the fact that you might find yourself in a vicious financial circle. If you take a payday loan repeatedly, you may become reliant on them and thus, not be able to stand on your own financially. Believe it or not, loans are also something you need to be able to afford before you get them; otherwise, they may be a bigger source of problems than a solution.