It is a common question for many people. Before taking out a loan. Or any alternative form of credit, it is of utmost importance that you think about your decision.
You will need to be sure that you can afford to repay your debt. You should also make sure that you are borrowing money for good reason.
If you are asking yourself ‘should I get a payday loan? You may be interested to know what you should consider before you apply for credit.
As well, it is important not to reach your conclusion without considering all these points.
Should I get a payday loan for things I am planning to buy?
What do you plan to use your loan for?
It said that you do not borrow money unless you have to do so. Valid reasons to take out a loan might include paying the bills. Or making an essential buy such as a new part for a broken down vehicle.
Despite this, a study by the Debt Advisory Centre found that;
- 20% of borrowers used their payday loan for a holiday
- 12% got into debt for Christmas or a birthday
- 5% used their payday loan for treats, such as a new handbag or a console game
Payday loans are a high-interest form of credit. Borrowing £100 for a month would cost an extra £24. This might not seem a big consideration if you cannot pay a bill or need money for an emergency. But is it worth paying so much extra to get your hands on the latest game?
If it is not essential, saving the money could likely serve you better. By saving in advance, you also remove the risk of unexpected circumstances. They could leave you unable to repay what you borrowed. If you did miss a payment deadline, further charges would get added to your loan.
Discover the situations when you should avoid payday loans.
Should I get a payday loan or are there alternatives that do not involve debt?
If you are sure that you need the item or service that you are planning to buy. Then you should first think about alternatives that do not involve applying for credit.
Selling belongings for spare cash
Selling your belongings could bring in enough money to cover whatever you are buying. Unfortunately, this is not usually a quick solution to your money problem.
Selling items can take time. You might avoid debt by doing so, but will unlikely receive your money immediately. Payday loans can be in your account within hours.
Borrowing money from friends and family
Good friends and members of your family may be able to lend you some cash.
The benefit is that this cash will usually get provided on an interest-free basis. Furthermore, you will not need to go through any form of credit check.
The drawbacks of borrowing from friend are the possibility relationships could go sour. Especially if money is not repaid on time. Many people also find it difficult to discuss their financial situation with relatives.
Allowing your bills to go unpaid
What if you do not have the money in your bank account to cover a Direct Debit, or to pay your bills? Then you do have the option to leave them unpaid for a month.
You are likely to get charged a default fee for any missed payment. Your bank may also charge fees of their own, for administration and processing.
Often, leaving bills unpaid will be more expensive than covering them with a payday loan.
Should I get a payday loan or an alternative form of credit?
Payday loans are particularly suited to people with poor credit ratings. They may be unable to access alternative forms of credit. Such as credit cards and planned overdrafts.
Consumers pay a premium, in the form of high interest, for the risks associated with lending. More so to those that don’t have a good credit rating. As a result, other ways of borrowing money will often work out cheaper.
Alternatives to payday loans might include:
Credit cards often start with a 0% interest deal. As long as you quickly repay what you have borrowed on a credit card, there should be no charges at all.
Credit cards work for purchases made directly. But you may also be able to transfer money to your bank account for a small fee.
Traditional bank loans are usually more affordable over a short period of time. They have a lower APR.
Whilst payday loans are repaid within a month. And whilst other short-term loans might be repaid over a few monthly instalments. A bank loan may get provided over a longer term.
Over a long period of time, a traditional bank loan can be more expensive than a payday loan. Always check. Comparing payday loans with traditional loans before making a choice between the two.
Overdrafts are usually a convenient option, essentially extending your bank account. To pay these back, you have to add enough money to your account to get the balance back into the black. There are no separate accounts to manage. As you would have with a credit card or bank loan. And you will not need to transfer money before you can spend it with your debit card.
Before choosing a bank overdraft, look into the associated costs and charges. Many unauthorised overdrafts and some authorised ones can be more expensive. More so than a payday loan over a typical month.
Alternatives to payday loans: weighing up the options
Before selecting any financial product, including those not mentioned above. It is important to compare with other potential alternatives. It is also important to understand the terms and conditions of the product that you are choosing to use.
Look into the short-term costs and the long-term costs. As well as any extra fees and charges that may apply. Especially if you cannot keep up with your financial commitments.
Each type of product will have benefits and drawbacks. You should make your decision by weighing these up, and considering all your options.
With a payday loan, you will never pay back more than double the amount that you originally borrowed. Take this into account when considering not just short term repayments. But also what could happen if you cannot pay your loan back on time.
Should I get a payday loan, with poor ‘long-term’ financial prospects?
Payday loans are not intended to be a long-term form of debt. They get used to bridge the gap between one payday and the next.
If you find yourself repeatedly taking out payday loans then you are facing a bigger issue.
Likewise, if you need to apply for further credit to meet your existing financial commitments. Then you are in financial difficulty. A Competition & Markets Authority report stated that 17% of borrowers had underestimated themselves. Especially how hard it would be to make their loan repayments.
If you are struggling to manage existing debt, or if your income is not high enough to get you through the month. Then a payday loan is not the right option. Applying for short-term finance could put you into further financial difficulty.
Instead, you should seek debt advice. Or find ways to reduce your outgoings, or increase your income.
Your options might include taking on a second job, finding a more highly paid role or looking over your budget. You may be able to remove a satellite TV subscription. Or avoid the coffee shop each morning, to save a significant amount of money each month. People often find that the small purchases. Including occasional visits to the supermarket make money problems worse.
Before taking out a payday loan, you should know when you are getting the money to repay what you owe. You should also know how you will pay back your loan if there are further unexpected events.
Lenders will provide clear details about your repayment amounts, and repayment dates. So that you can have the money available in your bank account.
“Should I get a payday loan?”
If you are considering borrowing from a short term lender, you have many things to consider.
You should only apply for a payday loan if you know how and when you will pay it back. If your financial difficulties are not a regular occurrence. And if you are not already struggling with a debt problem.
Before borrowing, consider alternative options. Including borrowing from friends and selling a few of your belongings.
If you decide that you need to apply for credit, start by weighing up the available choices. Consider the costs of alternatives such as overdrafts, traditional loans and credit cards. If you have access to any of these, they may be more convenient and more affordable. Yet, this is not always the case.
Remember that payday loans are a high-interest option for short-term borrowing. When comparing the types of credit that are available, think how much they would cost over long periods of time. With payday loans, you will never pay back more than double your initial loan amount.
Finally, think about your own long-term prospects. If your need for a payday loan is likely to be reoccurring, look at ways to change your financial situation. You may need to find a job that pays a higher salary, or analyse your budget and cut back wherever possible.