Desperate times call for desperate measures. We seldom think our borrowing decision through when an emergency strikes. Many of us end up resorting to high-cost short-term loans to cope with such expenses.
Payday loans are one of the most common forms of HCST loans. But these loans are replete with grave repayment implications and exorbitant interest rates. So what route does one pursue during an emergency?
Read on to find out six payday loan alternatives that you can consider instead of resorting to expensive loans.
What are payday loans (online)?
Payday loans fall under the umbrella of high-cost short-term credit solutions. These loans are designed to help credit-challenged borrowers to obtain a quick cash advance to cope with unplanned expenses.
The typical loan amount for a payday loan ranges from £1000 to £2000, which you can repay within a week or a month. Since the loan amounts are small, lenders are quick to disburse these loans, sometimes within a matter of hours.
Payday loans have garnered quite a reputation in the lending market – they are one of the most notorious forms of credit. Payday loans have excessively high-interest rates and APRs, with the average APR sometimes exceeding 300%.
Many who borrow payday loans without fully comprehending the terms, end up taking on additional debt to pay off their payday loan balance. A payday loan could push you further into the debt trap if you have a low credit score.
Is there a price cap on instant payday loans?
The soaring prices of payday loans were a cause of concern for many, including the Financial Conduct Authority (FCA). In addition, speculations were that many borrowers filed complaints stating that they were not made to understand the interest implications of payday loans.
After this, it didn’t take long for the FCA to impose restrictions on payday loans. One such restriction was the price capping that the FCA placed on payday loans. As per the price cap, a lender cannot charge you over £24 over a 30-day term for every £100 that you borrow.
Furthermore, the maximum penalty that a lender can impose on a missed payment is £15, plus the interest on the loan amount. The overall cap ensures that the lender doesn’t charge you more than twice the original borrowed amount.
These changes were instrumental in safeguarding the interest of consumers and minimising the exploitation by lenders. All lenders who wish to deal in payday loans must comply with the FCA’s payday loans guidelines.
Should I consider payday loans (bad credit)?
Payday loans target people with low credit scores with seemingly attractive loan offers. But, there is a gauge on a borrower’s repayment capability in the case of payday loans, meaning low credit borrowers at risk of default have easy access to these loans.
Moreover, unreasonable interest rates and APRs make it even harder to afford repayment. In such cases, most people accumulate more debt to pay the previous one, which, unfortunately, ends in a debt trap.
Thus, if you’re struggling with a low credit score, it would be best to consider alternatives instead of borrowing a predatory loan from a shady lender. Contemplating at the right time can help you make an informed decision.
Online loans no credit check – What to consider?
No credit check loans are another typical example of high-cost short-term lending. These loans are advertised as a credit solution that doesn’t damage your credit score. Many people fall for these marketing gimmicks and end up borrowing no credit check loans.
Most people that resort to this option either:
- Don’t have a good credit score based on which lenders may reject their application.
- Want to avoid a credit check as individual credit checks can cause a temporary credit score dip.
- Don’t have a substantial credit history and want to borrow a no credit check loan establish credit.
Whatever the case may be, it is crucial to understand that all FCA-approved are required to carry out a thorough credit check before lending money as part of the FCA guidelines. If you come across a lender who doesn’t carry out proper credit checks, they may be operating illegally or running a sketchy business.
6 Alternatives to online payday loans
- Personal loans: Personal loans are easily accessible unsecured loans that you can borrow to cover urgent expenses. Unlike payday loans, you can split the cost of your venture into affordable monthly instalments with a personal loan.
- Homeowner loans: Homeowner loans like home equity loan and HELOC are great financing options for people with a low credit score. These loans can help you obtain credit at relatively lower interest rates. However, you require an asset to secure a homeowner loan.
- Credit union loans: A credit union works like a financial cooperative where members pool in their savings and accumulate money. Other members can borrow money from these savings at a nominal interest rate (usually 1 – 3%). Although, a credit union only lends money to its members. You could join a nearby credit union and pool in some savings to become a member.
- Salary advance: Our co-workers are a second family. Try and explain your financial hardship to your employer and request a salary advance.
- Use your savings: If you’re not borrowing a payday loan to cope with an urgent expense, you could consider saving money instead. You could refrain from buying an item or starting a venture until you’ve reached your savings goal. This could be a fun activity to participate in with your loved ones too. Plus, nothing brings more gratification than a prize you’ve worked hard for and earned.
- Borrow from friends or family: Your family or friends are your confidantes. Tell them about your situation and ask if they can offer any help.
Conclusion
Several Brits still borrow payday loans, despite the risk they pose to their financial stability because they fail to understand the complete terms and conditions of these loans. It may be wiser to look for alternatives before resorting to a payday loan. Weigh the pros and cons of each credit option before taking the final call, as it could have ramifications on future credit opportunities.
