Payday loans are short-term loans that can be used to pay for unexpected expenses. These loans typically cost between £50 and £1,000. Although payday loans are easy to obtain, their interest rates can be quite high. It’s not unusual for them to have an annual percentage rate of 1,500%. Although payday lenders offer greater flexibility, you will usually repay the loan when your next paycheck arrives. Payday loans are often paid by direct debit. However, some lenders allow for more flexibility.
A payday loan can be applied for by anyone over 18. However, approval depends on your credit score and financial information as well as the criteria of the payday company.
Your credit score will determine how likely you are to get approved. Some companies specialize in payday loans for people with bad credit, so they might be able to approve you even if you have a low score. You may be required to pay higher interest fees.
What effect will a payday loan have on my credit score?
Payday loans won’t usually affect your credit score, provided you pay it back on time. However, there may be some exceptions. If a company views payday loans negatively (e.g. Payday loan customers may be less trustworthy borrowers, so having one in your credit report could count against you. Keep in mind that any loan application could temporarily lower your credit score due the hard search and the addition of a new credit card to your profile.
You don’t have just one credit score. Credit reference agencies, lenders, and other companies will all calculate your score using different criteria and methods. Payday loans can have different effects on your score depending on which organization you use. Lenders know that people who take out short-term loans don’t always have to be in financial crisis. Some lenders won’t even distinguish between payday loans or other loans.
What are the potential risks associated with payday loans?
The biggest risk is being trapped in a debt cycle – such as borrowing money to cover shortfalls, and then paying interest on the loan.
You could be charged fees for failing to repay your payday loan on time. The Financial Conduct Authority (PS15) caps these fees and charges interest on the amount borrowed. Payday loans can be very costly due to the high interest rates – which are often as high as 1,500% APR.
Payday loans are subject to daily interest charges. Interest is charged as a percentage of what you borrowed. The higher the loan amount and the longer the term, the higher the interest rate.
Is a payday loan bad?
Payday loans should not be taken lightly. It’s not a good idea to get a payday loan if you are already in debt or if you don’t know if you can pay it back.
Payday loans are risky and high-interest. It’s not worth the risk or cost to pay for things that can be delayed or don’t need. It may be a good idea to save money, borrow from family or friends, or find a lower-cost credit option.
Payday loans won’t affect your credit score as such, but it all depends on the criteria of the company. Payday loans shouldn’t affect your credit score. However, it is a good idea to avoid payday loans if you have an important credit application, such as a mortgage application. Payday loans can indicate that you are in financial difficulties or you don’t know how to budget.
If you think that a payday loan is the right option for you, ensure you carefully read the terms and conditions, adhere to a budget and make sure there are sufficient funds in your account by the due date.
What happens if I take out a payday loan but change my mind?
You can cancel a payday loan agreement if you received it less than 14 days ago. The full amount borrowed plus any interest will have to be repaid. You must pay all additional charges back.
How can I consolidate my payday loans?
Consolidating payday loans can simplify repayments and lower interest rates. Consolidating means consolidating debt from multiple accounts into one, with ideally a lower interest rate. This is not the right solution for everyone. Remember that applying for another account could lower your credit score.
What can I do to avoid payday loans?
A strict budget and a willingness to save money each month are two of the best ways to avoid payday loans. But, sometimes life isn’t so simple. These may be your options if you are unable to pay for unexpected or urgent costs or if you have difficulty paying regular bills because of overspending.
Borrowing money from family or friends
Reduce other costs
You can sell your own property
If you are unable to repay your lenders on time, speak with them.
Consider another type of credit with a lower limit such as a personal loan, credit card or bank overdraft arrangement
