Quick Cash, Big Questions: Weighing the Pros and Cons of Payday Loans

Many salaried individuals in the UK already have their expenses chalked out for the month. This can include rent or mortgages, credit card bills, utilities or travel expenses. Despite having monthly allocations, emergencies can arrive, before the next salary gets deposited into your account.

At such times, payday loans can come in handy.

Payday loans are short-term loans for smaller amounts of money. The amount borrowed can range anywhere between £50 to £1,000. As the name suggests, you would have to return it by the next payday.

One of the main advantages of payday loans is that they can be taken out by borrowers with low credit scores. This is not the case when applying for traditional loans.

However, like everything else, this quick cash method has both upsides and downsides. Let us look into them!

Advantages of Payday Loans

1. Your Credit Score Does Not Matter

Payday loans are often extended to those with bad credit scores. For traditional loans, credit score plays a pivotal role in getting approval. This can be especially helpful if you are in a bit of a fix and need immediate cash. In this way, you can meet your needs without breaking into your savings or investment portfolio.

2. Easy to Apply

Yes, payday loans are much easier to apply for as they only access your bank account. Imagine a scenario where your car suddenly breaks down and needs immediate repairs. Spending a few hundred pounds on car repairs can be a big stressor on your finances especially if you are in a tough spot.

This is where a payday loan can help. All you need to do is visit the website of an FCA-authorised lender and apply for the amount you need. You will need to provide a few details and should be on your way to receiving the necessary emergency funds in your time of need.

3. Faster Approval

Payday loans are designed to meet your emergency needs. If it had an extensive approval process, it would fail to meet the very purpose of its creation. Many lenders approve payday loans in less than a few hours. Traditional loans can take a few days to several weeks for approval.

4. No Need for Collateral

Emergencies do not come with forewarning, and sometimes, it just needs a few extra pounds to tide over the situation. Payday loans can be the saviour in such instances. Additionally, these quick loans do not require any collateral or security. Thus, there is no fear of losing your home or house, if you fail to repay the loan on time.

Disadvantages of Payday Loans

1. Higher Interest Rate

Payday loans often have higher interest rates. So, if you do not have a clear understanding of the borrowing cost, it can lead you into added financial trouble. Unless your situation is very dire it is best to avoid these loans. Sometimes, the amount that needs to be returned is significantly higher than the borrowed sum.

2. Creates Debt Cycle

With higher interest rates and shorter payback periods, payday loans often create a vicious debt cycle. This can lead to further borrowing and can disrupt your financial planning. As a payday borrower, if you cannot pay back the loan on time, the lender might offer options like extending the loan or taking out another loan.

This will often lead you into extended loan cycles, even higher interest rates, and payback amounts.

3. Can Make Bad Credit Scores Worse

If you have a poor credit history, taking out payday loans and failing to repay them can negatively impact your credit score. Additionally, even if you do manage to repay the loan on time, it might fail to positively affect your credit score. This is because many lenders do not report these loans to credit bureaus, and hence your responsible behaviour will not aid you anyhow.

4. Smaller Time-frame To Pay Back

With a looming recession and high levels of inflation, many of us are living paycheck to paycheck. Payday loans with their shorter loan period can lead to both financial and mental strain on the borrower.

With a repayment period of two to four weeks, it can become challenging to clear the debt, leading to loan defaulting or further borrowing.

Wrapping Up

Payday loans can be great to tide over a rough period, but they can also further propel you into a debt cycle. Thus, it becomes crucial to have proper financial planning in place. You can also create an emergency fund that will take care of any such unforeseen expenses.

Make an informed decision when it comes to taking any loan, be it payday or their more traditional counterparts!