Payday loans have established an important place in the credit market, providing quick financial solutions to millions of people every year.
Despite this, payday loan lenders get a hard time for the industry’s reputation, regularly portrayed as loan sharks by the press.
Should this be the case? Like most unsecured debts, payday loans have pros and cons, but when used appropriately can offer crucial financial support.
##How Have Payday Loans Changed For The Better?
A Brief History
Originating in the US, the concept of payday loans is centuries old.
1964 - The Bank of England was established as the UK’s first central bank. As time went on, more large banks were formed through mergers.
Only the wealthy minority had the option of borrowing money from banks. Most people turned to cheque cashing shops and pawnbrokers who offered an alternative.
1980s – 1990s A boom in the economy followed a period of economic volatility. Banks were able to issue their own credit and debit cards, competing for trade selling services like short and long-term loans.
Payday loans shortly followed, with banks making huge profit from risky loans. Able to charge higher interest rates to borrowers with bad credit scores, most of society became accustomed to living in debt.
2008 - The cycle of irresponsible lending and personal debt grew unsustainable, and the economy collapsed into the credit crunch.
Following the financial crisis payday loans saw a steep rise as regulations were instated discouraging banks from risky lending practices.
The Financial Conduct Authority
The Financial Conduct Authority (FCA) was formed in 2013 as a financial regulatory body.
The FCA ensures that all financial markets are honest, fair and effective in their services to customers. They were responsible for introducing stricter regulations to protect borrowers.
New rules included:
- Clearer risk warnings on advertisements
- Stronger affordability assessments
- Price caps (total cost cap = 100% of amount borrowed)
- Limits on the number of times a payday loan can roll over
Now, all legitimate payday lenders have the FCA logo on their website and can be found on the FCA Financial Services Register, giving borrowers more security than ever before.
The Money Service Advice has helpful information to prevent you falling victim to scams from untrustworthy lenders and fraudulent sources.
When Should You Take Out A Payday Loan?
The most important thing to remember is that payday loans aren’t intended to be used as long-term solutions to ongoing financial issues.
Payday loans take care of immediate expenses between pay cheques. The amount you can borrow is relatively low, so they’re best used to cover situations like:
- Unexpected medical bills
- Veterinary bills
- Urgent home repairs
- Car repairs
- Funeral expenses
- Fill a gap between moving jobs
You are given a 14-day ‘cooling-off’ period in the event you change your mind about your payday loan.
If you decide to withdraw from the agreement you must pay back the interest on any credit you have used, but all additional charges must be refunded.
The Perks Of Payday Loans
Unlike other loans that can take weeks to be approved, payday loans are quick to access and most of the time you can expect to receive money the same day you apply for it.
Using Multi Month Loans you can receive your cash in as quick as 15 minutes from applying.
They enable you to remain independent without seeking financial help from friends and family.
Even with have a bad credit score, you can still be eligible. Some lenders specialize in bad credit payday loans but be aware that additional interest may be charged because of this.
Tip: be aware of lenders offering ‘no credit check loans’. These aren’t FCA regulated or legal in the UK.
The loan application process is straightforward and most of the time can be done entirely online.
They offer flexibility. If you can’t repay the full amount straight away, you can set up a repayment plan over several months.
Payday Loans: The Pitfalls
Interest rates are measured as an Annual Percentage Rate (APR), with lenders typically charging interest for every day the money is borrowed.
For example, a payday loan of £200 could cost £48 in interest charges, totalling a sum of £248 to be repaid over the thirty-day period.
By regularly taking out payday loans risk becoming financially dependent on them. Used repeatedly, you may end up damaging your credit history, making future loan applications more difficult.
Strict regulations are now in place to protect customers, with greater information available to let people make well-informed decisions.
If used with care, payday loans offer a legitimate, secure, cost-effective service.
It’s important to know what you’re committing to, but if you meet the requirements and are aware of the risks, then it’s time to find yourself the best payday lender.