Payday loans: when they are good or when they are bad

Payday Loan

Some direct lenders advertise payday loans as the most affordable loans, but more than 80% of the users find them as a trap. Payday loans are short-term loans that help you tide over until your next payday. You can also consider them emergency loans. You can take out such loans in case of medical emergencies, unexpected bills, and the like.

It seems very easy to afford £1,000 to be paid back the next payday in a lump sum, but when it falls due, you end up rolling over a loan. As a result, payday loans have been denounced as a debt-trap loan. The fact is most people do not realise when they should take out payday loans and when they should consider alternatives. Payday loans can be your best buys if you smartly look over your financial condition before applying for them.

Every direct lender has a different policy, so you should research the market to get the loan at the most competitive interest rates. High acceptance payday loans from direct lenders can tide over your emergency needs and you can easily repay them on time provided you have not borrowed more than your affordability. This blog discusses both the circumstances when they can be good and when they can be bad.

Payday loans are best buys when:

·  You choose the lender with the low APR

Having said that each lender follows a different policy, it is crucial to ensure that you choose the lender that offers them at a lower APR (annual percentage rate). It can vary between 300% and 600%.

Of course, it will be silly to say that you should research at the time when you need money because you cannot hold up against emergencies, but you should carry out research beforehand. You should also ask your friends and family if they had ever applied for payday loans. Their experience can help you make a better choice.

· You choose a lender who allows for repayments in instalments

One of the significant reasons for falling behind repayments is a lump sum payment. The term of the loan is so small that you do not realise when the due date has come. As you need to pay back interest on top of the principal, it can be quite hard to pay off, especially if an unexpected expenditure has popped up.

Some lenders are out there who allow you to pay back the loan in instalments. Since the amount is small, it cannot be possible to set monthly repayments, but they can allow for weekly or bi-weekly repayments.

·You apply with a lender who runs a soft credit check and considers your affordability

If you have a bad credit rating, applying with a lender who runs a hard credit check can pull your credit rating, making it harder to apply for a loan at affordable interest rates the next time. Further, a reliable lender will examine your income statement to determine if you can afford to pay back the loan or not.

Payday loans are bad buys when:

· You take out them to fund regular expenses

These loans aim to help you tide over during unexpected expenses. If you apply for these loans to fund your regular expenses, you will end up rolling over them.

If you are facing difficulty making ends meet, you should consider cutting back on your expenses.

Try to make a budget, analyse your spending and whittle down discretionary expenses. Stick to your budget to be on top of your expenses.

· You take out them when other loans are outstanding

Even though you take out payday loans with a lender that provides affordable deals, it can be hard to keep up with repayments if you have other debts to settle.

People generally have credit card bills and outstanding bad credit loans when a new emergency pops up and as a result, no option is left other than taking out payday loans. Since these loans are processed as fast as possible, you can be tempted to apply for them.

The bottom line is all short-term loans can be difficult to pay off if you do not take into account your financial needs and affordability.

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