Are PayDay Loans Worth It?

Taking out a PayDay loan may sound like a good idea at first, but are they really worth it? We take a moment to explore if it is worth taking out a PayDay loan to get you by until your next paycheck clears.

What is a Payday Loan?

A Payday loan is a short-term lending option that provides you with enough cash to get you by until your next pay period. The amount you borrow depends on how much you make on a monthly basis or up to £1000. This type of loan is meant to provide you with enough funds to get you by until your next pay period. Once you are paid, you must then pay back borrowed amount with a fee included for the amount borrowed.

Payday loans continue to make borrowing cash an easy outlet for those who have poor credit because they will grant loans even with less than perfect credit. Additionally, Payday loan amounts can be quickly transferred to your bank account often in less than a day. This combined with many companies granting funds to those with poor credit ratings makes the process quick and easy. A typical Payday loan requirement to borrow funds is to be over the age of 18 and prove that you have a monthly paycheck from an employer. Thus, Payday loans are tempting for those who are in need of funds quickly and with little time invested in the loan process.  However, there may be little requirements needed to procure a Payday loan, but with the hefty fees instilled for borrowing it leaves many people wondering if a Payday loan is worth it.

 PayDay loan

What is the Catch?

A Payday loan sounds like a good deal, right? You borrow some cash to get you by until your next pay period, pay a fee and all is okay, right? Not everyone agrees that a Payday loan is a great alternative for those who are both in need of immediate funds and have poor credit, but there are many disadvantages of Payday loans that you should be aware of before going forward with a Payday loan.

At first glance a Payday loan seems harmless, yet the interest rate applied when borrowing funds is extremely high compared to other borrowing options. For example; for every £100 borrowed a 25% interest is charged making the amount of interest tenfold. Credit card companies are notorious for charging high interest yet the highest is generally around 30% whereas a Payday loan is much higher, nearly 1000% interest repayment based on a standard Payday loan.

A personal loan interest rate is typically around 10% APR making a Payday loan interest rate seems ludicrous. The second issue that stems from a PayDay loan is how easily it can be to continue to roll your loan over into the next month. By your next pay period you will owe more than your actual take home pay, making this option even more difficult to overcome. Applying for a Payday loan may seem like a good idea at first glance, but once you get into the actual details of the repayment process, interest rates and the drawbacks included you could easily spiral into a debt fueled loan process.

 Related article: Do Payday Loans Make Sense? 3 Reasons Why They Do

New Regulations

The FCA has introduced new regulations for lenders who provide Payday loans making the rollover option limited to two rollover periods before a loan must be paid back.

payday loan discussion

Can a Payday Loan Affect your Credit Rating?

If you utilize a Payday loan for fast cash and struggle with repayment there are serious consequences that could affect your ability to borrow funds in the future. Credit agencies are now using all borrowing situations as a determining factor to apply for any type of loan. This means your ability to apply for a credit card, or even a mortgage can be seriously affected even if you pay your Payday loan back in a timely fashion.

Read also: 10 Affordable Alternatives to Payday Loans

Payday Loans and Living Beyond your Means

Chances are if you are in a situation where you need a Payday loan you may already be living beyond your means or you are in debt making it difficult to apply for other lending options. Applying for a Payday loan can make your future debts even more substantial which leads to going further into debt. This can be detrimental to your overall financial stability. Payday loans may seem like a quick fix option for those who need immediate funds, but there are other options.

Alternative Options to PayDay Loans

If you are in debt and need help paying off loans contacting the Citizens Advice Bureau can help. They offer comprehensive help if you are struggling with paying back loans or if you have significant debt issues. If you are in a situation requiring funds quickly applying for a credit card with a 0% balance transfer can be an option as long as you intend on paying off the credit card amount in full within a month. Another option that provides a much lower interest rate is applying for a personal loan with a typical APR of under 10%. Both of these options provide you with an alternative to a Payday loan with a significantly less risk.

Using your banking institution to help with a short-term funding option can also be another outlet to visit before going forward with a PayDay loan. Many banks will help work with members or customers who need funds quickly because they can ensure the payments will be made by direct deposits via bank accounts.

So is a Payday Loan Worth it?

For many people who need funds quickly and fast applying for a Payday loan sounds like a quick fix to financial issues. But, this option is not an effective solution to digging yourself out of debt. Often borrowers find themselves in more debt than they began with by going with a Payday loan because the interest rate is so high and because you are borrowing against your monthly wages. Regardless of your needs a Payday loan is never a good idea. Although we discourage utilizing a Payday loan as an option for immediate funds if you find yourself with no other options, making certain you are receiving the best possible interest rate is the best way to ensure you are able to pay off your debt within the time allotted.

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Are PayDay Loans Worth It?
We take a moment to explore if it is worth taking out a PayDay loan to get you by until your next paycheck clears.
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