Understand the purpose of a loan
Anyone thinking about taking out finance needs to understand the purpose of why lenders make short-term loans available to borrowers.
These types of loans are not designed to be used all of the time.
Borrowers should not think of them as a type of regular or ongoing form of credit like a credit card or a revolving credit facility. They are designed only to be used for short-term and emergency needs only.
Loans you pay back within a short space of time have high-interest rates and, if you default on a loan, it could be that paying it all back becomes a lot more expensive than you intended it to be.
Click here to use the Money Advice Service’s alternatives to a quick loan online tool.
Calculate how much money you really need
If you are considering taking out a loan, then you should first calculate how much money you really need.
Once you calculate how much money you really need and you have come up with a final figure that you are happy with, that is the first big step in discovering whether this course of action is right for you.
Why is it important to calculate how much money you really need?
It is because limited-time loans are an expensive form of credit meaning that you only should borrow what you really need. Any extra that you borrow on top is just going to push up the amount of interest you pay back to your loan company.
Some lenders allow you to top up your loan although they generally want you to have paid off at least half of your loan before you can make another application. If you have taken out a 6-month loan for £500 but you actually needed £700, you might have to wait three months or more before your loan company will consider you for the extra £200.
Understand how much you can afford to pay back each month
Now that you know how much you want to borrow, you should now understand how much you can afford to pay back each month.
When you understand how much you can afford to pay back each month, you are best able to make the right decision on how long you need to take the loan out for.
If you wanted to borrow £500 over 3 months but, when you look at how much the repayments are, it would leave you £20 or £50 a month short, please do not take the loan out, even if you are offered it.
Instead, ask a loan provider or broker to increase the length of time you have to repay the loan.
The lower repayments mean that you would not struggle to meet your other commitments.
Please bear in mind that the longer the loan, the more you will pay in interest though.
Read the terms and conditions carefully
Every time you take out a loan, it is important to read the terms and conditions of your loan agreement carefully.
Each lender licensed by the Financial Conduct Authority here in the UK has a broad set of rules they must follow.
At the same time, they all have their own terms and conditions and it is important that you feel comfortable with those terms and conditions.
Remember that you are never under any obligation to accept any loan you are offered by a loan company. Before you say yes though, please do read the terms and conditions carefully.
What about borrowers who use a broker like CashLady?
The agreement will still be between you and your credit provider. You are still advised to read the terms and conditions carefully before you take out a loan arranged by a broker.
Understand the risks
The next step in your decision-making process when you are considering taking out a loan until payday or another form of limited-time credit is to understand the risks.
If you do not understand the risks and you do not think carefully about whether taking out this loan is the right move for you, the decision to do so might eventually catch up with you.
The great thing for many borrowers about the companies offering these types of loan is that they are much less concerned about any temporary financial difficulties you might have got into in your past.
Bad credit loan providers understand the risks involved in lending to people with less than perfect credit histories. What is important to them is that borrowers understand the risks involved in taking out a bad credit loan.
If you cannot meet all your repayments in full and on time, your lender will help you but they may charge you a default fee of up to £15 depending on their terms and conditions.
However, if you do fall behind and you then come to an agreement with your lender to extend your loan, it is even more important to understand the risks.
If you miss a repayment again, your lender may decide that you have permanently defaulted on your loan and, if that happens, your credit rating will really suffer in the long term making it harder to take out any more loans.
Make sure you borrow from a regulated credit provider
Remember headlines like “The payday lender that charged 16,734,509.4%” and “Payday loan companies ‘hounding’ homeless teenagers and pushing them into debt” from a few years ago? That is why, if you are considering taking out a payday loan, make sure you borrow from a regulated credit provider.
For many politicians and debt charities, the early years of online instant loans caused them a lot of concern. It wasn’t just the interest rates – it was the hidden charges and how borrowers who had fallen behind on payment were treated.
The Financial Conduct Authority had also had enough and, in 2016, they made bad credit loan companies, and finance brokers go through a series of hard-to-pass and rigorous tests to keep their licences to lend.
Lenders now have a code of conduct they must follow with borrowers. The three main rules are:
- Interest on loans cannot be charged at more than 0.8% a day
- Any default or penalty fees cannot be higher than £15. If you do default, your loan provider may continue to charge you interest but that interest rate will be at the same rate as you agreed to when you took the loan out.
- When added together, the interest and any default charges cannot add up to more than the amount you borrowed. So, let us say you take out £100. You will never be charged more than £100 in interest and default fees.
Any company lending money not registered with the Financial Conduct Authority is lending money illegally. That is why you should always make sure you borrow from a regulated credit provider. You can see CashLady’s Financial Conduct Authority register entry here.
Understand how short-term credit affects your credit score
Finally, you need to understand how short-term credit affects your credit score. Any payday or a short-term loan that you apply for or that you take out leaves a footprint on your credit record.
You might think it would be worth applying for many different loans at the same time to better your chances.
Unfortunately, this would show a lender that you do not understand how short-term credit affects your credit score or any other type of finance application for that matter.
Lenders get nervous about making a loan to a borrower if they see many different applications for a loan.
They make think that you are in trouble and, even if you are the type of borrower they like to work with, lots of different footprints would put them off lending to you.
In addition, some mortgage providers do not like to see payday loan or short-term loans on your credit file, even if you have paid them off in full.
Where can you find more advice?
There are five main advice services in the UK helping people understand more about high-cost credit loans. These organisations, also here if you find yourself in unmanageable debt, are:
If you have built up very large levels of debt already and you are considering taking out a loan at a higher cost to pay off the interest on other debts, please do not.
In these cases, you should find out more about whether an Individual Voluntary Arrangement, a Debt Relief Order (not in Scotland), or bankruptcy would be better for you.
If you have a problem with a payday loan or high-interest loan provider and you are not satisfied with the response you have received from their internal complaints handling team, you may refer your case to the Financial Ombudsman Service.
Get in touch with them by phone on 0300 123 9123 or go to their website at www.financial-ombudsman.org.uk.
Make sure you are certain that:
- You need the loan to cover yourself in an emergency,
- You are happy with the amount you are borrowing and the size of the repayments,
- You have read the terms and conditions and you are happy to be bound to them, and
- You are borrowing from a reputable company