Payday lending can be so easy obtain it can feel like a dream, but the high risk nature of this relatively new financial product can quickly turn into a nightmare.
With potential risks including vastly increased repayments and financial scars which last for years, you must find out all that you can about the safety of applying this decidedly dodgy option.
If you’re considering submitting an application, this is the perfect article for you. We’ll tell you all you need to know about the dangers as well as introducing you to the perfect cheaper alternative.
1. Extremely Expensive
Payday loans have only ever been intended as a short term fix and as implied by the name, should be repaid in full on your next payday.
However, even when used as intended, they are by far the most expensive option currently available.
Martin Lewis from Money Saving Expert states that:
“A payday loan feels easy, but this short term high cost credit can get you into an expensive nightmare – risking scarring your finances and leaving you repaying many times more than you borrowed.”
Martin Lewis Money Saving Expert
Why are they so Expensive?
Despite so fierce competition, the Competition and Markets Authority recently found that:
“A lack of price competition means that customers may be paying too much for their loans, according to provisional findings from the Competition and Markets Authority (CMA).”
For more on their findings please check out – “Payday borrowers paying the price for lack of competition”.
In July 2014, the consumer credit regulator set out proposals to cap the costs associated with this form of finance. We’ll include them in the guide if they go ahead with the proposals, but in the meantime, you can read about what the cap will do in the payday loans will slash costs news story.
2. Lenders get access to your bank account
The majority of payday lenders collect repayments directly from your debit or credit card. These “continuous payment authorities” or (CPAs) work in a similar fashion to direct debits in that lenders can take payments without checking with you first, the major difference being that CPAs will still be taken, even if this takes you overdrawn.
CPAs are quick to set up – either online or over the phone – but can be much more difficult to cancel. This can result in your finances becoming much harder to manage and charges from your bank if payments are taken without the required balance being available in your account.
If you are having difficulty cancelling a CPA, take a moment to check out the following Step Change article – How to cancel a CPA on a payday loan
Whilst many people may think that the easier a loan is to obtain the better, this is not always the case. As a general rule of finance, if you cannot afford the repayments, you should not be taking one out in the first place.
Because many lenders skip the required pre-agreement checks during the application process, they have no way of knowing whether you are in a position to afford the repayments or not.
Failure to make repayments (for any reason) is highly likely to result in expensive charges and spiraling costs, a situation which could have been easily avoided by simply completing the necessary checks.
4. They leave an impression on your credit record which is off-putting to future lenders
Many people turn to a payday loan to avoid going into an unauthorised overdraft. Whilst this may seem to be a sensible option, using payday loans for this purpose can actually lead to other problems.
The Financial Ombudsman Service told The Observer that while it has had few complaints about the loans, it has seen evidence mortgage lenders discriminate against payday credit borrowers.
“The number of complaints we receive about this type of finance is relatively low but we have had a number of inquiries from consumers who have been told by their lender that previous payday loans they have taken out – and paid off on time – have and will continue to have a detrimental impact on their credit rating.”
Credit reference agency Experian is actually known to list payday credit separately rather than including them in a general overview of borrowing history and some high street lenders may see the fact that someone has resorted to payday credit as a sign that their finances are under pressure, resulting in declined applications.
For more on this story please check out the Observer story – Payday loans can put credit rating at risk
5. Payday lenders can take advantage of vulnerable borrowers
In a practice known as ‘predatory lending’ some payday lenders have been accused of targeting their products at vulnerable borrowers, such as those on a low income or with limited options.
For more on this practice, please see the following:
Check your Credit Report
Many people opt for a sameday payday loan because they believe that this type of loan is their only option. This is often far from the truth though and regardless of your credit rating, (which can be found by visiting Checkmyfile to view your credit score), better options exist.
Checkmyfile See more than twice the information compared to any other Credit Report in the UK
Payday lending can be so easy obtain it can feel like a dream, but the high risk nature of this relatively new financial product can quickly turn into a nightmare.
Payday lending can be so easy obtain it can feel like a dream, but the high risk nature of this relatively new financial product can quickly turn into a nightmare.
Many people turn to a payday loan to avoid going into an unauthorised overdraft. Whilst this may seem to be a sensible option, using payday loans for this purpose can actually lead to other problems.
