No one wants to be financially insolvent, but many teeter on the edge of monetary disaster, living from payday to payday. When an emergency occurs, some people do not have the available resources to take care of it. After exhausting all other options, you may be considering signing up for a payday loan.
These high interest loans are extremely convenient and therefore tempting when you are in financial straits. However, you need to have all of the facts about payday loans before deciding that they are the right choice. If you cannot repay your payday loan, your financial situation and credit score will get much worse.
Payday Loans Are Both High Risk and High Cost
A payday loan is a short term loan with astronomically high interest rates. While you may not feel the bite of this high rate when you pay off your payday loan right away, it can start to add up if you require multiple payday loans in a row. Some payday loan companies also allow you to rollover your existing loan into a new one, increasing the amount of time you are paying interest.
Payday Loans Show Up on Your Credit Report – But Not as a Credit Check
Many payday lenders advertise themselves as no credit check lenders, meaning they only do a soft search on your credit, and tend not to focus on your score as much as your ability to pay. However, payday loans will show up on your credit report, in a separate section so lenders can easily spot when you have hit hard times. Even if you repaid your payday loan on schedule, it can still work against your long term credit prospects.
Payday Loans Can Easily be the Start of a Vicious Cycle
If you are having trouble paying your bills now, payday loans can make your situation much worse. By repaying the amount you owe plus the fee each payday, you are reducing the amount of money you have to work with. This can lead to a cycle of payday loans, putting you farther and farther in debt each week. If you have to get a payday loan, plan on using your time between paydays to raise money to cover both the loans and upcoming bills, otherwise you may be stuck in a hopeless situation.
Payday Loans Are Government Regulated, But Still Risky
The government has put regulations in place to protect borrowers, capping the total amount of interest a payday lender can charge. However, payday loans are still a costly method of getting cash, so do not let that comfort you too much. Payday lenders are also required to be licensed with the FCA Consumer Credit Registrar, so check there first to verify that your lender is operating legally.
You Have Legal Recourse if a Payday Lender Treats You Unfairly
While many lenders stand by the industry’s code of conduct, there are always those who are more than happy to give you the runaround. When your payday lender refuses to rectify a situation, you can take your case to the Financial Ombudsman Service. Filing your complaint here is free to you, and will help you understand your legal rights as a payday loan borrower.
There Are Other Options besides Payday Loans, Even With Bad Credit
Just because you have a poor credit score does not mean you are limited to payday loans. There are credit cards that are designed for people with low credit scores; although they come with higher than average interest rates, they are still much better rates than a payday loan. You can ask your bank for an authorized overdraft; as long as you can cover it, you will still be in a better financial position. While you may have already asked your friends and family for assistance, you may not have considered asking your employer for a small advance. Explore your lending alternatives thoroughly before choosing a payday loan.
While payday loans have their pitfalls, for some people they are the best option to improve their financial situation. Take all factors into account, and then carefully consider your options before applying for a payday loan. Done right, payday loans can help you get through a rough patch in your life, as long as you do not allow them to get out of your control.