Payday Loans

The Reality of Payday Loans

March 30, 2021

Some days are rough, so are some months. Not all of us have ample savings to tide us over to the next month. If you’ve been through a financial crunch like this, chances are that you may have considered a payday loan.

Pay loans have a notorious reputation in the lending market, but is it justified? Let’s find out!

What are payday loans?

A pay day loan is a high-cost short-term credit borrowed as a lump sum. Typically, the repayment period of a payday loan lies between a week and a month. Generally, people with a below-average credit rating, experiencing a short-term credit crunch, opt for this option.

Payday loans, often known as instant payday loans, are usually disbursed into the borrower’s account within a matter of hours. However, it isn’t wise to fall for the rapidity and widespread availability of this loan. It is important to understand the interest implications of these loans. 

The average APR of payday loans could exceed 300%, with extortionate interest rates. Although, the FCA (Financial Conduct Authority) price cap on these loans prohibits payday lenders from charging unreasonably.

For every £100 borrowed, the lender cannot charge more than £24 over a 30 day loan term. In case you miss a repayment or don’t repay an installment on time, the maximum default fee that a lender can impose is £15 plus the interest on the amount you borrowed. The overall cap also ensures that you don’t end up repaying more than twice of your loan amount to the payday lender.

Payday loans, no credit check – a marketing gimmick?

No credit check payday loans are high-cost, short-term loans wherein a lender doesn’t carry out a formal, comprehensive check of your credit profile. Although, FCA-regulated lender do perform a credit search on the applicant and take the fetched data into account to form a decision.

No credit check payday loans are typically lent based on the information that the lender already has about the borrower. The lack of an initial hard inquiry rules out the detrimental impact on the credit score. This could be attributed as one of the key reasons that people opt for this loan. The fact that there’s no hard credit check involved relieves borrowers with a below-average credit rating of:

  • The lender declining their application because of a bad score.
  • The hard inquiry further damaging their credit score.

Soft credit searches do not show up on your credit report as negative items, which is why, they don’t affect your credit score.

Once you opt for a loan offer, it is usually then that the creditor pulls in your credit report through a hard inquiry. If you come across a lender who doesn’t carry out a formal credit check at all, it would be wise not to enter into a credit agreement with them. Payday loans are regulated by the FCA, and with that, each payday lender is legally required to run a proper credit enquiry into the borrower’s credit profile, thus proving that no credit check loans are merely a marketing gimmick.

The concerning bit, however, is the exorbitant interest rates on no credit check payday loans. The APR can sometimes go as high as 400%. Additionally, there is no gauge on your ability to repay this loan. Most borrowers are people requiring urgent cash, so instead of considering a sensible alternative, they find themselves ensnared in this trap. While no credit check payday loans may seem like a convenient option, you should understand the interest implications and make a wise call. It is best to borrow only what you can afford to repay.

What are ‘payday loans – bad credit’?

‘Payday loans bad credit’ is a popular search time among borrowers. Bad credit payday loans are a form of high-cost short-term credit. This product essentially targets customers with a below-average credit rating, looking for quick cash to tide over a financial crisis.

The interest is something that a lender sets for a borrower considering their financial circumstances. Usually, applicant’s with a below-average credit score don’t receive offers with competitive interest rates. But, because payday loans are strictly regulated by the FCA, there is a cap on the fee and charges that a lender can impose.

So, while you may get a payday loan with a below-average credit score, you will not be able to avail low interest rates. With sky-high interest rates like these, you may end up paying way more than the principal itself.

Such offers can push you further into a debt trap. A majority of people get stuck in the payday loan cycle because they continue taking out a new loan to pay off the previous one. It may be in your best interest to steer clear of such offers and consider alternatives instead.

What was the impact of the FCA rate cap on payday loans?

Ever since the FCA implemented stricter regulations and capping on payday loans and other high-cost short-term credit options, there has been a substantial drop in the number of payday lenders. The number of borrowers have, however, increased, implying that filtered lenders can now serve customers within the FCA regulations and improve the market reputation of HCSTC (High-Cost Short-Term Credit) providers.

These regulations have also impacted tech giants like Facebook and Google, who have restricted explicit financial advertisements. The FCA’s initiative is a pivotal step in ensuring fairer credit opportunities, and eradicating consumer exploitation from the lending industry.

Will a payday loan affect my credit score?

A payday loan will usually not harm your credit score if you repay it in full and on time. A lot of payday loan lenders don’t report your repayments to credit bureaus, which means they are of no help in boosting your credit score.

Some Credit Reference Agencies (CRAs), however, may consider a payday loan as a negative item, and give you a lower rating. Additionally, a hard credit inquiry at the time of application can also reduce your credit score briefly. But since different CRAs have varied assessment criteria, a payday loan may impact your credit report differently in each case.

Are there any alternatives to payday loans?

Here are some payday loans alternatives to consider:

  • Cut back and save: Curbing your inner spendthrift is probably the best way to deal with a credit crunch. Work up a strict budget to cut back on the expenses and adhere to it.
  • Credit union:A credit union is a financial co-operative wherein members pool in their savings to help other members in need of a financial aid. Credit union loans are available at low interest rates (roughly 3%). However, a credit union only lends to it’s members. Find out more:
  • Borrow from friends or family:Your family may be your best confidante. Trust them with your financial problems and share you worries with them. They may be able to shell out some savings to help you out through the crisis. Having a repayment plan will benefit the both you and save you from the awkward conversation.
  • Consider a personal loan:A personal loan allows you to spread the cost of your expense into easy monthly installments over a fixed period. Unsecured personal loans don’t require a collateral, making them a more convenient choice.

In conclusion

HCST credit options, as the name suggests, come at exorbitant interest rates. If you’re trying to escape a debt cycle, borrowing a payday loan may push you further into debt. Weigh your options wisely to make an informed borrowing decision.

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