Payday loans are a quick and easy solution to help you cope with short-term costs, but there are also many disadvantages of payday loans that you need to be aware of before deciding whether this type of borrowing is right for you.
In this short guide, Finance Rate summarises the pros and cons of payday loans and helps you decide whether this type of short-term loan really is your best option.
Advantages of payday loans
Payday loans can help you deal with unexpected expenses such as bills or household repairs while you wait for your next wages to be paid into your account.
Although you must be wary of payday loans, they do have some advantages:
They are easy to access
Unlike more traditional loans, a payday loan can be applied for online in just a few minutes, making it an incredibly convenient option for borrowers. The money could reach your bank account on the same day, which is ideal if you have urgent unexpected costs to cover.
What’s more, there are many payday lenders to choose from, which makes it even easier to access this type of loan. Just bear in mind that each payday loan will have different terms and conditions, so be sure to shop around to find the right option for you.
You can get approved even with bad credit
The acceptance criteria for payday loans are often less strict than for other more traditional types of lending, which means you may be able to get approved even if you have a poor credit history.
Payday lenders are less interested in whether a borrower has an unstable financial past, and more concerned about whether they can afford the loan in the here and now.
They are a type of unsecured loan
Many traditional lenders will require you to put your home or other valuable asset up as collateral when you take out a loan – this is known as a secured loan. If you failed to make repayments on time and in full, the lender would be able to seize your asset and sell it to recoup the money you owe them.
Payday lenders, on the other hand, often offer unsecured loans. These loans do not require you to put up an asset as collateral, which means you can borrow money without directly putting your personal property at risk.
Disadvantages of payday loans
While there’s no denying that payday loans offer a quick and convenient solution when you need instant access to funds, this type of loan also comes with some significant drawbacks.
Payday loans aren’t suitable for everyone, and they could push you further into debt if you’re already struggling with your finances.
They are expensive
One of the biggest disadvantages of payday loans is that they are usually very expensive, especially compared to other forms of borrowing. Some lenders apply interest rates of up to 1,500% APR, which can cause the total cost of borrowing to spiral.
With such high rates, it’s easy to see how some people struggle to repay payday lenders. There are many other types of loans that offer more reasonable rates that you should consider before deciding to take out a payday loan.
They can trap you in a cycle of debt
If you already have financial difficulties, a payday loan could cause you to enter a debt spiral. You might find yourself having to take out another loan just to repay your existing debt because of how high the interest rate is on payday loans, which can leave you in all sorts of financial trouble.
Many people consider payday loans to be predatory because of this, as they target individuals with low incomes and poor credit histories, forcing them further into debt. The market is more regulated these days to help protect vulnerable people, but payday lenders have earned a bad name for themselves in the past by rigorously pursuing unpaid debts.
They may take payments without your approval
When you apply for a payday loan, the lender will often request for payments to be made via Continuing Payment Authority (CPA). This enables them to take recurring payments directly from your bank account up to the amount they choose at any time, subject to there being sufficient funds available.
Bear in mind that a reputable lender, authorised by the Financial Conduct Authority (FCA), will always get your permission before taking any payments from your bank account.
Should I get a payday loan?
You should only ever take out a payday loan if you’re certain that you will be able to pay it back in full and on time. If you don’t have enough money in your account to make the repayments, you could end up falling into a vicious cycle of debt.
If you’ve weighed up the advantages and disadvantages of payday loans and still think it’s the best option for you, you should do the following before applying:
- Consider how much you actually need to borrow. The maximum sum the lender can offer may seem appealing, but if you don’t need it then it’s not worth the high repayments.
- Take time to shop around. Different lenders will offer different terms and conditions, so you need to be sure that you’re choosing the one that’s most beneficial for your circumstances.
- Choose your lender carefully. Most lenders are now regulated by the FCA, but unfortunately there are still some that might not have your best interests in mind. You can find out if a lender is FCA-regulated by taking a quick scan of their website.
If you’re unsure about whether a payday loan is suitable for you, or you’re worried about choosing the right lender, it’s always best to seek advice from a financial adviser. Citizens Advice also offers some reliable advice on payday loans that you might find helpful.
Remember – there are other short-term loan options available that might be better suited to your needs than a payday loan. Read our comprehensive loans guide to find out more about the different types of loans.