A Guide to the Advantages and Disadvantages of Payday Loans

What are the advantages and disadvantages of payday loans? We’ve all been in that predicament when we need a few quid, quick. Payday is fast approaching, but it’s just not fast enough. Well, could it be payday loans to the rescue?

Here in the UK, we have access to loans and funds almost at our fingertips. Plus, since a lot of banking has migrated to the online world, it’s easier than ever. We have new online money lenders and banks flooding the market as well as access to money just when we need it. It’s a miracle.

And there’s no judgement here. There may be a stigma surrounding the culture, but payday loan examples can stretch to pretty much anything. From getting a car MOT bill far higher than you budgeted for to needing a new set of school clothes again because the little ones just aren’t so little anymore. 

As well as this, we don’t all have our circle of trust (thanks Meet the Fockers for that one) to lean back on.

Advantages and Disadvantages of Payday Loans

So, if you’re considering getting a payday loan, we’ve mapped out exactly what you can expect with some common FAQs around the subject. As well as this, of course, we’ll be taking you through all the advantages and disadvantages of payday loans so you can make the right choice for you.

DISCLAIMER: THIS POST DOES NOT PROVIDE FINANCIAL ADVICE OR RECOMMEND ANY FINANCIAL PRODUCTS. SEEK PROFESSIONAL ADVICE BEFORE TAKING OUT ANY LOANS/ FINANCE PRODUCT.

TAKING OUT HIGH-INTEREST PRODUCTS CAN LEAVE YOU IN SERIOUS FINANCIAL DIFFICULTY.

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What is a Payday Loan?

The first thing we want to address is what a payday loan is. Strangely enough, it’s not exactly what you’d expect. Instead, it’s an emergency loan from a moneylender of your choice (not a bank) to help get you through to your next payday.

Payday loans are often characterised as being a short-term payment, with relatively low funding options. Then, they’ll have very high interest rates as a pay-off to fast access.

Generally, with payday loan examples, you’ll need to pay them back after a month’s period. However, it’s becoming more popular to see loans extended over three-month periods where the repayment is completed either in pre-arranged instalments or in a lump-sum at the end. 

How Much of a Payday Loan Needs to be Repaid?

Well, all of it. And a little more sprinkled on top.

As mentioned, getting a payday loan will often come with hefty repayment interest hurled onto the amount you initially borrowed. Luckily, payday loans are carefully watched and regulated under laws set by the FCA (Financial Conduct Authority).

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This means that there is actually a cap on your interest rate and the amount you’ll be charged for borrowing. One of the payday loan examples would be to pay no more than £24 in interest per every £100 borrowed on a 30-day loan. 

Of course, if you accidentally default the payment, there is a cap on that fee, too. But you’ll only be charged an extra £15.

The Advantages and Disadvantages of Payday Loans

The advantages and disadvantages of payday loans can vary depending on your circumstance and where you decide to lend from. However, as it is an emergency fund to access, there is bound to be both sides of the coin. So, we’ve laid them out for you:

Advantages of payday loans

Being aware of the advantages to getting a payday loan can help decrease anxieties and stigmas surrounding the subject. They help a great many people out there with surprise costs. Especially if there isn’t a credit card, overdraft or family member to lean on in a time of financial need.

The other advantages to taking a payday loan out when in need include:

  • They’re short term
  • They’re easy to access
  • They offer fast cash
  • They’re often done electronically
  • They provide instant relief
  • There are few requirements
  • There are no credit checks
  • They are protected by FCA
  • They offer payment plans

Disadvantages of payday loans

But, as mentioned, with the advantages, comes the disadvantages. And they remain the leading cause of avoidance. If you can avoid any of the payday loan examples you’ll get from lenders, we suggest doing so. But that isn’t always a choice. So, it’s vital to be aware of the negative impacts that having a payday loan can bring, too.

Here are the disadvantages to getting a payday loan:

  • They feature high interests
  • They create cycles of debt
  • The lenders have access to your account
  • They can’t build credit
  • You give CPA (Continuous Payment Authority)
  • They’re too easily accessed
  • Debt collectors can come
  • You may be worse-off next payday
  • Some mortgage lenders may not accept you if you have taken out payday loans in the past

Can You Get Payday Loans Online?

Now you’re aware of the advantages and disadvantages of payday loans, you have a good basis to make strong decisions about your next financial move. 

And if you want to use online channels to do so, you can. 

Even before we were confined to our homes for what feels like an eternity, more money lenders were migrating to online platforms to reduce costs and speed-up any banking requests. This includes the need for a payday loan. 

In fact, getting a payday loan online grants you access to immediate funds straight to your bank account. 

There are many out there such as Quick Quid, Wonga, Dot Dot Loans, Drafty, Satsuma Loans and more. Although we suggest checking sites such as Trust Pilot as well as the Consumer Finance Association to make sure service is on-point and you know you’re getting in with a trustworthy money lender.

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How Do You Qualify for Getting a Payday Loan?

Another one for the list of advantages and disadvantages of payday loans is their accessibility from qualification. Really, it’s one for the advantages list. They’re incredibly easy to qualify for.

With online money lenders, you only need to visit the site with the qualification criteria and send your proof through email or their dedicated online forms. Or, if you decide to go into a branch (such as a specific money lender like Cash Converters or to a pawnbroker such as H&T Pawnbrokers), you’ll just need to take your proof with you. 

Then, you can have your money in the account the same day when you qualify. So, there isn’t a long or drawn-out process for checking your eligibility.

To be getting a payday loan in the UK, you need:

  • To be over the age of 18
  • A UK citizen
  • To have an income
  • A UK bank account
  • To have a credit check done
  • To own a debit card
  • A mobile phone number or email address
  • Proof of identification

How Do You Manage Payday Loan Debt?

As we’ve said, one of the biggest disadvantages to getting a payday loan is being in the predicament of falling into the cycle of payday loans. 

When you need the extra cash without notice, you’re left mounting up the interest before you get paid. Then, when you’ve received your wages, a large chunck is going back to the money lender, leaving you with the need to visit the payday loan examples once again. It becomes a vicious cycle. 

In fact, just to throw a few figures at you, the CMA’s (Competition and Markets Authority) report shows an average of 75% of loan takers end up needing more loans. With that, the average number of payday loans taken out in a year by a single household is around 6.

Luckily, there are a few ways to help you out of the cycle, or even prepare for the worst if this is your first rodeo.

Consider Payday Loan Alternatives 

Payday loans are not the only option out there. When it comes down to choosing between the bills and the food shop, get the bills done and then head to charities and food banks who will help any family in need.

Other alternatives include asking for help from friends, family and peers or trying to sell items for cash on sites like Facebook Marketplace.

Consider a Consolidation Loan

There are a couple of different types of consolidation loan you could pursue after getting a payday loan. For example, if you’ve got the one loan from a money lending company in a hurry, you could head to your bank for a low-interest short-term loan that covers the cost of the original payday loan while reducing your overall payback.

Alternatively, if you have a few loans on the go, you might want to talk with your bank regarding one low-interest loan that will cover all the others, meaning you’re only paying back one sum of money to one location each month.

Consider an Extended Payment Plan

Some payday loan companies will let you extend your repayment plan if you’re struggling. Of course, this means a larger sum paid back to them in the long run, but it also reduces stress on your shoulders and allows you to decrease the money you’re paying to a more manageable amount.

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However, you’ll have to do your research and check with agencies such as the FSR (Financial Services Register) to ensure the lender is regulated and trusted.

Can a Payday Loan Affect Your Credit Score?

Just like any other way of borrowing or using money through a financial-handling organisation in the UK, it affects your credit score. And, depending on how you handle the payday loan, it could be either one of the advantages or disadvantages of payday loans.

When you take out a loan, it will be marked against your credit report. Then, when you pay the amount back, it will create another mark on your credit score. So, a payday loan can affect your credit score.

However, it can be negative or positive.

For example, if you go down the route of getting a payday loan and paying it off exactly as agreed, it will increase your credit score due to proof of financial stability and organisation. A default on a payment, on the other hand, will have the opposite effect and your credit score will decrease.

It is worth knowing that if thinking about getting a mortgage in future, some lenders may count having a payday loan on your credit file against you (even if you made all the repayments on time).

Either way, it pays to be mindful of this, as your credit score will affect most – if not all – financial moves you want to make in the future. Including your eligibility to get another payday loan with the next emergency!

So, we hope that has been cash in your pocket when it comes to understanding more about the advantages and disadvantages of payday loans (and what they even are). 

Here at Value4Money, we’re all about helping you make strong financial choices that move you forward in a positive way. If that means getting a payday loan, then so be it. However, we do want to advise against it if there are any other options out there. 

Luckily, we also have our wallet packed full of interesting and easy ways to make passive incomes and savings to help you become financially free.

THIS POST DOES NOT PROVIDE FINANCIAL ADVICE OR RECOMMEND ANY FINANCIAL PRODUCTS. SEEK PROFESSIONAL ADVICE BEFORE TAKING OUT ANY LOANS/ FINANCE PRODUCT

TAKING OUT HIGH-INTEREST PRODUCTS CAN LEAVE YOU IN SERIOUS FINANCIAL DIFFICULTY.

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