For many people, the benefits of a payday loan are not immediately obvious.
Designed purely for the short term and with higher interest rates than many forms of borrowing, payday loans are not for everyone.
In fact, it is recommended that these short term loans should only be used for emergencies.
A payday loan should not be a regular form of borrowing (or indeed income). You should know exactly how, and when, you will be able to pay back your loan.
Yet despite these considerations. there are often benefits to payday loans that make them very useful for consumers in certain circumstances.
Payday loan benefits
Suitable for people with bad credit
A person with poor credit history might struggle to borrow money. Most providers of traditional consumer loans will reject any high-risk applications.
Individuals considered to be high risk might have struggled with debt in the past, though the high-risk category can also include people with no credit history at all.
Payday loan companies do stringent affordability checks but have compensated for the high level of risk by charging higher levels of interest than other UK lenders.
As a result, they can often accept loan applications that other types of lender will not.
Easy application process
In the majority of cases, a payday loan application process is done entirely online. In exceptional circumstances, further types of evidence may need to be provided.
For most people, applying for a payday loan involves nothing more than completing an online form with personal and financial details.
These details are secure and will not be passed on to third parties, but they will be used by the lender to make a quick decision.
Easy to manage
Most borrowers choose to manage their payday loan online. This is one of the payday loan benefits that can make them easier to control.
When you apply for a loan, you are typically given access to a personal online account. When you log in, you can see your current loan balance and any repayment dates, as well as having the option to make an online payment.
Managing your loan online makes it easy to make early repayments if you have the money available.
Early repayments can reduce the amount that you pay overall.
Making use of various modern technologies, many lenders will send payment reminders by text or email.
This can help you to ensure that you have money in your account to cover payments that are taken automatically using a Continuous Payment Authority.
Quick money for emergencies
Emergencies do not wait.
If your car breaks down or the boiler needs replacing, you may not have time to wait for a traditional loan to be approved.
As well as offering online forms to save you from a trip to a physical store, many lenders can transfer the money to your account within minutes of a successful application.
Pounds to Pocket, for example, advises that most loan decisions are made within 30 minutes, with money sent to the borrower’s bank account within 10 minutes of approval.
There are currently no restrictions on the use of a payday loan. You can use the money for anything that you need to use it for.
That said, it is strongly recommended by everybody in the industry that you only use your payday loan for absolute life essentials and emergencies.
Could save you money
Default fees, overdraft fees, bounced cheques and other charges can quickly mount up.
By taking out a payday loan to cover expenses that you cannot afford, you may reduce the amount that you pay overall. You should only do this if you are sure that you can repay the loan by the end of its term.
You might be about to miss a credit card minimum payment and may also be in an unauthorised overdraft by £20. Taking out a £100 loan could allow you to make your credit card payment (saving you from a late payment fee of potentially £25) and could enable you to pay off your unauthorised overdraft (saving you up to £100 a month).
Meanwhile, thanks to strict regulations put in place by the Financial Conduct Authority, borrowing £100 from a payday lender would never cost you more than £24 in interest over the course of a single month.
FCA regulations also ensure that you will never pay back more than double the amount that you originally borrowed.
Instead of paying £125 in charges and fees alone, whilst still owing your credit card payment and being £20 into your overdraft, the same amount of money could have paid off these two debts if you took out a short term loan.
Short term impact
Some forms of credit can put you into debt for more than 12 months.
Payday loans are intended to be borrowed over very short periods of time – days or weeks – and will not hang over you for years.
Available at all times
Payday loans are available outside traditional banking hours. The online application process provides the opportunity to borrow money at any time of the day or night.
You can also manage your loan 24/7, making repayments or checking your balance as often as you like.
Trustworthy regulated lenders
The Financial Conduct Authority closely monitors the payday loan industry.
Lenders need to register with the Financial Conduct Authority before they can carry out restricted activity (such as providing a loan or offering a loan broker service).
Once approved, they will feature on the Financial Services Register.
Consumers applying for payday loans can benefit from the security that the Financial Conduct Authority provides.
Borrowers should always search the Financial Services Register, checking that they are working with an approved company before making a loan application.
Strict caps in place
The FCA has ensured that interest rates for payday loans are capped at 0.8% per day.
This is 80p per £100 per day or roughly £24 per month on top of the original borrowed amount.
For comparison, some unauthorised overdrafts can cost as much as £100 per month in fees, on top of the £100 borrowed.
The FCA also introduced a total cap, which means that consumers will never pay back more than double what they originally borrowed. If you received a £100 loan, you would never pay back more than £200 with interest and fees added on.
Meanwhile, overdrafts are not subject to the same limitations. The costs of an overdraft can continue to mount up until it is paid off in full. Banks can even charge fees on authorised overdrafts that will push you into unauthorised borrowing, where the charges are much higher.
Bank overdraft fees can be added month after month, so that the cost of borrowing £100 can continue to grow, almost without limit.
Controlled by the borrower
When you apply for a payday loan, you choose the amount of money that you borrow and the repayment terms.
You will be provided with clear information about the overall repayment amount, any monthly instalments (if your loan is to last for longer than a month), and of course – your repayment dates.
You can then adjust the amount that you are borrowing, or the length of your loan term, to tailor your loan to your needs.
It is recommended that you borrow exactly the amount that you need. Not borrowing enough can leave you with further expenses elsewhere, which can cause financial difficulty, whilst borrowing too much will likely lead you to pay unnecessary interest on money that you do not need.
If you do borrow more money than you need, most lenders will allow you to repay early without any additional charges.
Check your terms and conditions for details about early repayment.
The benefits of payday loans are numerous.
- It is relatively easy to apply for a payday loan. There are online forms and you do not need to visit a physical location.
- You might find that your payday loan application is accepted, even if you have poor credit history.
- You can manage your loan online, checking your remaining balance or making repayments at your convenience, anytime, day or night.
- Payday loans are available relatively quickly, making them suitable for emergencies. You might be able to apply for a loan and receive the money, within an hour or two.
- These loans can be spent on anything that you would like to use the money on, though it is recommended that they are only used for emergencies and essentials.
- Payday loans could (in extreme cases) even save you money. Other forms of borrowing and missed payments, can become more expensive overall.
- A payday loan is a short-term form of credit. It will not be hanging over you for years.
- Payday loans are very strictly regulated by the Financial Conduct Authority. This protects you, as the consumer. Strict caps on fees and interest ensure that you will not be charged excessively for your loan.
- Loans are consumer-controlled. You choose the amount of money that you borrow and the amount of time that you would like to repay your loan over. You will be clearly shown how much you will need to pay in total, along with each instalment amount. You can make an informed decision to take out a payday loan.