The Shocking Truth About Most Poor Credit Personal Loans
There are many loans designed for people with a poor credit rating, and they can be perfect for getting you out of a fix with quick cash, or are they?
Some of these loans and payday loans, in particular, can be extremely expensive and rather than helping can actually make your financial situation much worse.
In this article, we look at some of the dangers associated with applying for bad credit loans and offer a way to avoid them.
Stuck in a hole leading up to payday?
This is a common problem and for anyone without an overdraft can be a tricky one to overcome.
As anyone with a poor credit rating will know, turning to your bank for an overdraft is highly unlikely to result in a positive answer, and trying to obtain a personal loan is likely to be equally unfruitful.
Short-term poor credit personal loans have been designed specifically to bridge this borrowing gap and despite the constant stream of negative publicity surrounding payday loans in particular, this form of credit has never been more popular than right now.
How much do you actually know about payday loans? Payday loans – what you need to know
Why people fall into the payday trap
Lightning-fast turnarounds and no red tape to often lead borrowers to think they offer the perfect option, however, questionable lending practices ensure that these are loans which must be approached with caution at best.
The loans can be very expensive and have caused many people serious financial problems, but there are other options.
Below, we identify four of the most common of the ‘questionable’ lending practices currently employed.
Click here to see how the payday loan trap actually works.
1. Payday Loan Companies Love a Rollover
In National Lottery terms, a rollover is always a good thing. In payday loan terms, a rollover can lead to a very slippery slope.
If you find you can’t repay the loan and cover your essential outgoings, payday loan companies will fall over themselves to offer a loan extension (also called a rollover). This means that you will be liable for much more in interest and other charges, making it even harder to clear your debt.
This article in the Guardian explores this in greater depth – What is a payday loan – and why are they so controversial?
Recurring Payments = Danger
Although the application process is designed to be as quick and easy as possible, some lenders do not even insist on a credit check before agreeing to a loan and a large number of payday lenders insist that a recurring payment, also known as a continuous payment authority (CPA) is put in place.
By setting up this CPA, they will be able to take repayments directly from your account on the repayment date without asking for further permission.
If you do not have the money to cover the repayments in your account, this will inevitably lead to either missing the payment and incurring a fee or exceeding your overdraft limit and having to pay bank charges.
- The Government run Money Saving Advice explores this practice in greater detail in their article Recurring Payments for Payday Loans
- This is Money recently highlighted a case where a woman was allowed to take out EIGHT payday loans at the same time.
2. APR’s can far exceed the figures quoted!
Many people see a loan advert and believe that it is a foregone conclusion that the quoted APR will be available to them.
This is far from certain to be the case though.
The APR which is advertised is only obliged to be a ‘representative example’ of a typical loan’s cost.
This means that this interest rate only needs to be available to 51% of customers who apply for a loan and can often result in APRs far exceeding the initial figure quoted.
Please Note – A recent BBC report highlighted plans for a cap on the amount that payday lenders can charge their customers have been announced by the City regulator.
Payday loan rates should be capped at 0.8% a day of the amount borrowed, said the Financial Conduct Authority (FCA).
Find out more about APRs and what they actually mean by clicking here.
3. They do not tell you about the 14-day cooling-off period!
Payday lenders do not highlight the fact that all borrowers have the ability to withdraw from the agreement at any time within the first 14 days assuming they repay any interest that may have been accrued.
For more on this along with information about payday loans and lenders in this Money Advice Service article – 5 Things Your Need To Know About Payday Loans
Affordable poor credit loans are available
Not to say that all poor credit personal loans are bad with lower cost alternatives such as guaranteed loans available.
A personal loan with a guarantor offers many of the benefits of a payday loan (speed, online, flexible repayments), but are often available at 10% of the cost!
If you would like to look into benefits of this type of loan please see our Loan Calculator and use our application form to submit one application to many of the UK’s top poor credit personal loan lenders to receive a number of no-obligation quotes.