Monday, July 4
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Don’t Know Which Payday Loan To Choose? Turn To Your Credit Score

Payday loans are great when you need fast cash. They offer short-term low-value loans at high interest rates, even to people with a low credit score. Thus, they can be used to deal with unexpected emergencies.

However, payday loans have a bad name. They ask for high fees; almost 1000% expressed as an APR. Moreover, this fee can increase if the money remains unpaid or gets rolled over for a few months.

Additionally, payday loan lenders have a reputation for poor practice. They are unrelenting in both sales and collection and resort to harsh tactics if you avoid them. They also send unwanted marketing texts and emails, which may lead you to become a repeat customer even if you cannot afford it.

Therefore, the Financial Conduct Authority (FCA) had to place restrictions on payday loans. They ensured that the total cost of a loan wouldn’t be more than 100% of the principal amount. These restrictions have led to a drastic reduction in payday loan approvals.

Payday Loan Alternatives

Fortunately, there are many alternatives to payday loans that offer similar benefits. While your credit history and score may affect your chances, one of them may be the more affordable choice. Be sure to conduct a payday loan comparison before you choose, though.

Credit Unions

Credit unions are community-based organisations that offer low-value loans ranging from £50 to £3000. They don’t work for profit, and their interest rates are capped at 3% per month in the UK. Thus, the costs of debt are managed.

However, credit unions often have specific eligibility criteria for a loan to be sanctioned. Additionally, you may not receive the money immediately after applying for the loan. Therefore, credit unions may not be the best option for urgent cash.

Community Lenders

Community lenders aim to help those that cannot access financial help elsewhere. They are often small, independent groups that work in deprived areas. As they are set up to help their members and local communities, their interest rates and fees are low.

Arranged Overdrafts

Arranged overdrafts can be added on your bank account. They are essentially a loan from your bank, where you pay your bank the interest and fee that you would generally pay a lender. You can even negotiate these rates with your bank.

Thus, an arranged overdraft is often a much cheaper option than a payday loan. Moreover, if you can get a 0% overdraft deal, it reduces the cost of borrowing drastically. A 0% overdraft essentially means that you can acquire the money interest-free, provided you pay it back within a specific time frame.

Credit Cards

Credit cards are one of the most popular forms of credit. They can be a suitable alternative to payday loans, particularly the credit cards with 0% deals on purchases. Many introductory cards have this offer.

However, most credit cards are issued only 14 days after application. Thus, plan ahead if you want to use a credit card. Keep in mind that credit card debt must be paid back in full within the specified time period to avoid additional interest.

Local Councils

Another option is a budgeting loan from the Social Council. You can take advantage of these loans when you are in desperate need of help after a sudden disaster like a flood or a fire. You will find these budgeting loans at the local councils.

However, many of these schemes have been cut, and they differ based on location. Moreover, there are specific eligibility criteria for these loans.

Family And Friends

Another alternative to payday loans is to borrow money from family and friends. While this may seem like an awkward thing to do, you can make the process formal by creating a borrowing contract. The contract should address the following points:

  • The amount borrowed
  • The period and form of repayment
  • The interest applied if any
  • The consequences of late payment/non-payment

Online Finance Companies

Another alternative to payday loans is online finance companies. They often offer easy, short-term loans at very low interest rates. These loans very affordable, and, therefore, easily paid back.

Thus, you don’t stay in debt. Moreover, taking such loans allows you to improve your credit rating. This, in turn, eases your access to financing in the future.

Additionally, online finance companies often offer tips for financial planning. As a customer, you can get budgeting tips, ways to improve your credit rating, and other such useful information. This allows you to make informed decisions about loans and credit when required.

The Costs Of Borrowing

No matter the form of borrowing, there will be costs of repaying associated with them all. The ability to understand these costs before you borrow can save you from unnecessary monetary troubles.

Most financiers have a flat rate or an Annual Percentage Rate (APR). A flat rate is the interest applied to the principal amount, whereas an APR is the total cost, including the interest and the fee, to be paid annually.

High APRs seem expensive, but a flat interest rate actually costs you more. This is because, with flat interest rates, the interest is charged on the original loan amount at the end of the loan period. For APRs, however, the interest is charged only on any remaining amount to be paid.

The Importance Of A Payday Loan Comparison

It is important to note at this point that short-term loans from mainstream lenders may actually cost more than payday loans. For example, a bank overdraft may cost more than a payday loan with a high interest depending on its fee structure. This is why it is necessary to conduct a payday loan comparison before deciding your form of credit.

You can compare lenders and their charges using an online comparison website. Additionally, be sure to work out a rough estimate of how much you will have to pay before committing to any loan application.

In the end, though payday loans are popular, they may not be the best option for you. It is always better to compare the alternatives available and choose the one that best suits your requirements.

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