Some months are more financially unsustainable than others. Not all of us can rely on savings to tide us over to the next month. But should you consider a payday loan to overcome this financial crunch? 

Let’s find out more about the problems with borrowing a payday loan. Are there any alternatives that you can use instead? Read on to discover.   

What are payday loans online?

Payday loans are a form of high-cost short-term credit that you can borrow to overcome a financial crunch. You can pay off a payday loan within a week or a month. Payday loans often appeal to people looking for a quick cash advance with a very low credit score. 

Since payday loans are designed to cope with urgent expenses, their disbursal is fairly quick. But, you should tread cautiously – as quick and accessible payday loans are, they’re entwined with sky-high interest rates and APRs. The average APRs of payday loans can sometimes exceed 300%! 

Although, the Financial Conduct Authority recently introduced price capping of payday loans, prohibiting lenders from charging unreasonably. 

For every £100 you borrow, the lender cannot charge you over £24 for a 30-day term. In case you miss a repayment or fail to make a timely payment, the maximum penalty that a lender can impose is £15 plus the interest. The overall cap also ensures that you don’t repay more than twice the loan amount to the lender. 

Even after the price cap, payday loans can be difficult to deal with. Unlike personal loans, you cannot spread your payday loan across several months. A payday loan needs to be repaid within a month, which makes it tough to manage repayments. So, weigh the pros and cons carefully before making a decision.

Payday loans: bad credit – What to consider while borrowing?

Bad credit payday loans essentially target customers with a below-average credit rating, looking for quick cash to tide over a financial crisis. A lot of these applicants may have faced rejection from other lenders before resorting to payday loans. 

However, payday loans have high-interest rates and APRs. The interest rate is high as it is, regardless of your credit score and overall financial circumstances. So, you may be able to get yourself a payday loan with a low credit score, but it’ll cost you much more than other financial products – a personal loan or secured loan.

So, while the upside is that the FCA strictly regulates payday loans with price capping, there is no strict gauge on the borrower’s repayment capability. Such credit products can push you further into a debt trap. People often get stuck in the payday loan cycle because they keep taking out new loans to pay off the previous ones. 

Are payday loans ‘no credit check’ a gimmick?

A no credit check payday loan is ideally meant for people with a low credit score seeking credit without undergoing a credit enquiry. Several borrowers with a low credit rating opt for no credit check loans because:

  • They’re fear the damage that multiple formal credit checks will cause their credit score. 
  • They’re afraid that the lender may deny the loan based on their credit score. 

All FCA authorised lenders must perform a formal (hard) credit enquiry before lending money to the borrower. Hard credit checks are a way for lenders to gauge a borrower’s repayment capability. 

Lending a big amount of money to a borrower with little to no repayment means is not justified. Thus, the FCA requires lenders to perform a formal credit check on borrowers before they approve a loan. 

After you accept a preapproved loan offer, an FCA authorised lender will perform a hard enquiry on your credit profile. Lenders take a call based on this hard enquiry and your affordability, among other factors such as employment status, electoral registration, etc. 

But, for people with a low credit score, qualifying for these checks and getting a loan can be challenging. This is where no credit check lenders come in. No credit check lenders also carry out a hard enquiry. However, these lenders lend money despite low credit scores. 

Unlike other lenders, no credit check lenders don’t let your credit score drive their lending decision. This is one of the key reasons people with a low credit score no credit check loans are convenient. 

However, no credit check payday loan also have soaring interest rates. Since there’s no gauge on the borrower’s repayment ability and a higher risk proposition, lenders tend to set high-interest rates on loans. 

FCA authorised loan brokers like Oyster Loans can help you compare loan offers from multiple lenders. Oyster Loans has a panel of FCA approved lenders that offer various options for people with a low credit score struggling to borrow money.

4 alternatives to payday loans

  • Personal Loans: Personal loans allow you to spread the loan’s repayment into affordable monthly instalments, meaning you can repay the loan over a longer span. If you have a good credit score and need funds urgently, you can use a personal loan to cope with the expenses.  
  • Credit Unions: Credit unions are non-profit financial co-operatives that lend money to union members seeking financial assistance. The interest rates for credit union loans are low (up to 3%) as they only aim to cover their costs. Members of a credit union are associated in some way or the other – living in the same area or working in the same profession. The only downside is that you need to be a member of a credit union to borrow from them. 
  • Guarantor Loans: If you do not have a stellar credit history, personal loan lenders may lend you money with a guarantor. A guarantor is a friend or family member who partakes in the loan’s obligations by cosigning the loan. If you fail to repay, the onus of repayments will fall on your guarantor. 
  • Salary Advance: Another option is to explain your financial crisis to your boss and ask them for an advance on your wages. If you are a benefits claimant waiting for your first payment, you can seek assistance from Jobcentre Plus for a short-term advance. You can then pay off this advance out of your benefits.

Conclusion

HCST credit options are often expensive and need to be repaid within a very short duration. If you’re trying to get out of a debt cycle, borrowing a payday loan may push you further into it. Weigh your options wisely and make an informed financial decision.