Running out of cash before your next payday might have happened to you. You’re not alone; one out of three people deplete their cash reserves before the month ends.
Why does this happen? Failing to budget and track your expenditures can cause you to overspend. Your income might not sufficiently cover all your financial obligations.
The question to ask is how to raise cash for emergencies before your next payday, some short-term lenders offer payday loans. Today, we’re taking a position against all manner of payday loans, and you’ll see the solid reasons behind our stance.
All you need to know about payday loans
It’s a short-term loan. You obtain it to clear small expenses. For instance, your car’s steering can get damaged and require an immediate fix. You might need cash for home repair and other emergency expenses. The payday loan amount is relatively small, ranging from £50 to £1000. Some lenders may offer up to £5,000.
The requirements, though, are not stringent. Lenders factor in your employment, financial, and personal situation, but most people get accepted. You’ll be required to live in the UK, have a regular income, a valid UK bank account, and be at least 18 years old.
You get cash within a short time. Some payday loans are offered at brick-and-mortar stores, but it’s much faster to approach online lenders. The online application process and approval can take less than one hour. Once you get approved, the lender deposits the amount in your bank account instantly, sometimes within 10 minutes. You can even access payday loans during bank holidays or weekends.
You’ll repay the payday loan eventually. Most short-term lenders extend the loan for a duration of 1 to 3 months and split the number of repayments. For instance, if you took out a payday loan with a repayment period of one month, you’ll make one repayment. For a loan with a 3-month repayment period, you’ll make three repayments. Clearly, these loans are not intended for long-term borrowing.
Example of Payday Loan
Amount of credit: £1000 for 90 days Three repayments of £240 first month, £240 second month, and £1240.00 last month. Borrowing just £1000 might result in you paying £1720, as the APR is above extremely high, in this case, 172% in three months, making it an APR of 688%!
Problems with Payday Loans
1. “Quick Payday Loans”
Beware of companies advertising “Quick payday loans.” They may not want to genuinely help you. Some have been accused of preying on vulnerable customers, branding their loans as “quick,” which makes them look like the best relief for their short-term money problems. In reality, the loans can bring regrets later on.
2. Getting stuck in a cycle of debt
With less stringent requirements, payday lenders may advance credit to people caught up in debt. However, they end up becoming more problematic because it’s a high-cost credit form.
3. High-interest rates
Annual Percentage Rates (APRs) that include interest and fees on payday loans range from 400% to over 1000%. The interest is charged daily. According to https://nation21loans.com, the Financial Conduct Authority capped the interest rate at 0.8% per day and recommended that fees not exceed the amount borrowed. Still, payday loan costs are prohibitive.
4. High risk of late repayments
When you opt for a payday loan, you have likely spent your salary. Your next paycheck is probably budgeted for with no extra money for repaying the full loan amount together with the interest and costs.
Fortunately, the FCA capped the default fees at £15, but the lender is allowed to continue charging interest. Late repayments and defaults will also lower your credit score.
If you’re planning to apply for a mortgage loan soon, some strict mortgage lenders might consider you less responsible and bad at budgeting because you recently took out a payday loan.
5. Payday lenders automatically deduct money from your credit union or bank account
Most short-term lenders ask for your bank account details, so as they can deposit the loan and also debit money from the same account for repayments. You’ll be asked to agree to this condition even if you have an overdrawn account.
Alternatives to Payday Loans
Payday loans should cater to emergencies, and not for anything you want to buy but don’t need. It’s better to just wait for your paycheck. Also, consider exploring other options.
1. Borrow money from friends or family
First off, it’s a terrible idea, because you’ll put your relationship at risk. You may not want to be seen as relying on your loved ones. Try this option if you’re very certain that you can repay the money on the agreed deadline.
2. Opt for a cheaper form of credit
Talk to an expert and let them divulge all the options at your disposal. For instance, installment loans that offer fast payouts, longer terms, and more cash.
3. Get out of debt
You can end the cycle of debt even if it seems very unlikely now. First, try and find experts willing to offer debt counseling. Help is a call away: National Debt Line (0808 808 4000) or StepChange.
Next, reduce your costs, apply for cheaper credit cards, and learn more about debt reduction strategies.
4. Utilize local resources
If you’re in need, it’s a plausible idea to find local charities and nonprofits that might support you by paying for your utilities, food, or rent.
5. Ask for payment extensions
Request more time to pay your bills. You’ll have to write letters to your providers. Many people caught up in tight financial situations find a reprieve this way, and you might arrange for a longer payment plan.
6. Find ways to raise more money
You can venture into the gig economy and raise money through ridesharing, freelance writing, consulting, signing up for food deliveries, etc.
7. Use 0% credit cards
You can qualify for promotional credit cards that offer 0% interest rates for up to 28 months. However, you can lose your deal if you fail to make the repayments each month. After the promotion period ends, the interest rates kick in and they might be high. Also, if you make many 0% credit card applications, you can put a negative mark on your credit file.
8. Join credit-unions
Credit-unions are made up of people sharing something in common such as their work, location, place of worship, etc. They place value on the well-being of their shareholders by offering low-cost loans, and the profits made benefit all members.
Payday loans are tempting, but still very expensive. Don’t fall for them when you can find a different way out.