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Payday loans are short-term credits that are designed to help tide borrowers over to cover their financial shortage until their next payday. While most lenders expect borrowers to pay the principal and the interest on their next payday, or by the end of the month, there are lenders that may allow borrowers to choose their preferred term.
How Payday Loans Work
Lenders can lend between £100 to £1,000, though this can vary from lender to lender. Considering how this is a short-term loan, expect that the interest rates will be generally high. However, the fast processing time and the lenient requirements have made these loans the go-to among many a borrower, especially those whose credit records aren’t especially spotless.
The funds, once the loan is approved, is typically paid into the borrower’s bank account. Usually, this is within 24 hours of the loan approval with some even releasing the funds a few hours upon approval. Repayments are usually taken from the borrower’s bank account once due. Typically, lenders charge £24 for every £100 that is borrowed.
Requirements for Payday loans
There are basic requirements that potential borrowers will need to meet to get approved for a payday loan. A borrower needs to be 18 years old and a UK resident. He must have a working bank account as well as this is where the lenders are going to deposit the funds directly. This is also the same account that they will be deducting the payment from come the loan’s due date.
In addition, a borrower needs to have a steady source of income too. He need not be employed, but must prove that he gets a steady source of regular income to ensure that he can pay off the debt by the time it is due.
Benefits of Payday Loans
The speed in which one can take out a payday loan is also one of the many reasons it has grown in such popularity among the borrowing public over the years. The requirements tend to significantly easier, more lax, and lenient compared to standard bank loans. In addition, most lenders do not require a hard credit check when assessing prospective borrowers, which makes it possible for those with bad credit to get access to emergency funds. Applying for one is convenient too, since most lenders offering this credit are operating online. So, you can choose to send your application through this medium.
There are a lot of advantages that one can get out of payday loans. Easy to access, convenient, and fast, it serves well as a last resort for people who are short on cash and want to take out a loan for the short term. However, it is easy to not keep up with the payment if one is not careful. Understanding the implications of a payday loans default is essential so you’ll be more motivated to avoid such a risk in the first place.
Why Payday Loans are Risky
Payday loans may seem to be a sound solution when you need cash fast. But they can get overwhelming especially if you’re already struggling financially to begin with. The easy access to these loans can make it easier for people to avail of them and then risk ending up with multiple payday loans that they will not be able to pay off.
The fees attached to these loans are expensive. Since most lenders only require a few things from borrowers and the unsecured nature of these loans will make it harder for borrowers to pay back the loaned amount along with the interest come the due date. This can lead people to roll over the loan which can lead to more fees thus, causing the debt to balloon if one isn’t careful.
Trouble with Your Bank Account
It is common for payday lenders to automatically charge the bank account that the borrower has listed upon his application. When a payday loan has not been paid on time, the lenders will try to withdraw the money from your account. This can result in overdraft fees by your bank every time you have an insufficient balance the moment that a withdrawal is attempted.
There are payday borrowers that may decide to secure another payday loan just so they can pay back the previous one. However, doing so only worsens the situation. The new loan comes with new fees and interests and will only make it harder for you to pay it back. You will only likely end up defaulting on multiple loans if you take this path.
What to do before you default
If you feel that you are at such a high risk of defaulting on a payday loan, get in touch with the lender. Explain what is going on and see if there is a way for you to get the payment terms renegotiated just so you won’t end up in collections.