Payday loans are incredibly easy to apply for and access. According to the Citizens Advice Bureau (CAB) Payday Loans Survey, 98% of borrowers stated that they found payday loans easy to use. However, ease of access to money makes this source of financing potentially dangerous. It is the model of payday loan companies to make loans easy to access – after all, they are designed to be used in an emergency when you need money quickly. But, payday loans are easy to misuse and can cause many to end up in a cycle of debt. With a payday loan, you can get your money with minimal effort, but that doesn’t mean you shouldn’t take precautions to protect yourself and carry out proper research before making an application. In this guide, we look at how to use payday loans safely, the Financial Conduct Authority (FCA) regulations around payday loans and some of the things you should check before taking out a payday loan.
Quick Guide to Easy Online Payday Loans and Alternatives
In today’s market, there are a vast array of lenders offering payday loans in the UK, generally with an easy online application and quick payout. By merely completing information online, you could receive a payout the same day, making online payday loans one of the easiest and fastest ways to access money. However, it is essential that you are aware that there are other options for short-term borrowing where you need a quick solution. For example:
Borrowing from friends or family
Speaking to your bank about arranging an overdraft
Asking for early payment from your employer
However, these options can take time; they are not guaranteed and may cause you some embarrassment. Most of these also depend on your relationship with the person or institution you are asking to borrow from. If you can’t pay them back, it could cause even greater difficulty for your personal life and stress levels. With a payday loan, you can receive the money the same day with minimal fuss, without involving someone you know personally.
What Are the Dangers of Online Payday Loans?
While payday loans are very convenient, they also pose a considerable threat for many. In a recent survey, the vast majority of those who took out a payday loan went on to borrow again. In fact, only 9% of the respondents took one loan. Of the 8000 people who responded to the survey, almost half had taken out five or more payday loans in the preceding year. It is clear that once a person starts to take out payday loans, it can be difficult to stop, creating a cycle of debt. Unfortunately, paying back a payday loan can be expensive. Payday loans are designed to be simple, convenient and for emergencies. As a result, they come with a significant interest rate, and paying off a payday loan or multiple payday loans can cause further financial difficulties. Around 1500 respondents to the survey reported using a payday loan to pay off another payday loan. We will discuss this later, but such borrowing can cause a dangerous cycle of unmanageable debt for many people.
So what does all of this mean? Are payday loans safe to use? Yes, but it means that both payday loan lenders and their customers must be extremely cautious. Using a reliable, responsible lender who takes steps to verify that customers can afford to pay them back is the best way to take out a payday loan. Here we give some of our tips on what to look out for when taking out a payday loan.
How to Use Payday Loans Responsibly
Payday loans can trap many people, so any responsible lender should promote finding alternative options to payday loans as far as possible. You may be able to get a general ‘feel’ for a lender just from their website. Do they come across as understanding and empathetic? Do they make it clear that payday loans should be a last resort?
With that said, many need a payday loan to cover an emergency, and they are still a lifeline for many in need.
Choosing a Lender
Choosing a lender is one of the most challenging parts of using payday loans safely. Here we provide our tips.
When you choose a payday loan lender, you should ensure that their lending policies include precautions to prevent users from falling into a cycle of debt. This may include not allowing customers to take out more than one loan at a time or using a payday loan to pay off another payday loan.
However, although the lender may take precautions to protect their customers, ultimately, it is your responsibility as a lender to make responsible choices regarding your finances. Therefore, you need to understand the dangers of payday loans to avoid them. Reading this guide is an excellent first step, and you should conduct as much research as you need to ensure that you can take out a payday loan safely before you make an application.
Secure and professional website
This may seem necessary, but does the website of the lender look legitimate? A payday loan website should look like the website of a bank. If it is a severe lending institution, they will have invested time and money into creating a website that is easy to use and provides a lot of good information about their services. The site should also be secure. You will be supplying sensitive data via the application form, and so the lender must have good cybersecurity practices.
Clear and specific information
Any legitimate lender will have clear and specific information regarding the fees and interest rates involved in taking out a payday loan with them. If anything, you should feel like they are providing you with too much information. You should fully understand what you have to pay and when, what happens if you want to make repayments early, and any interest rates or penalties that will apply if you can’t pay on time. Some lenders will try to avoid letting you know what you will be liable to pay by using terms like ‘small fee’ or minimal interest’. Where it is not clear what the charges and fees are, you should avoid taking out a loan with the lender.
Similarly, where a lender makes the process, or information confusing, this can be a red flag. Lenders that use a lot of jargon or complicated language or where their terms are disguised in lengthy and complicated forms should also be avoided. You should feel informed and confident, moving forward with a payday loan.
Using a direct lender rather than a broker
A direct lender is just that – you will be borrowing the money directly from the institution you make the application with. On the other hand, many payday loans brokers act on behalf of lenders and take a fee for every payday loan they ‘sell’. Brokers often put a lot of effort into their Search Engine Optimisation (SEO) to ensure that they appear on the first page of Google to get more sales. Just because a website is high ranking doesn’t mean it is the most legitimate.
When you deal with a direct lender, you will make the application directly on their website. They will then process your application and let you know if you have been successful. They will deposit the money into your bank account, and it is this lender you will pay back when you have the money. With a direct lender, you only deal with one business, whereas there may be multiple parties in the chain with a broker. Brokers may send your application to multiple lenders to determine whether any of them will give you a loan. You may be charged a fee for this service.
Questions to ask
Who is behind the company?
When obtaining a payday loan, it should be clear who is behind the company. You should choose a lender with a real address and people behind the business – rather than a nebulous internet setup. An address might not always be prominent, but you should find contact details somewhere on the site.
You should also check that the company has a licence and that the licence mention belongs to the company in question. It is easy to check, the Financial Conduct Authority (FCA) number should be listed on the site, it should be clickable, and it should lead you to the FCA’s website. A website that features only a picture of an FCA number could be a red flag that they are not an authorised lender.
What Can I Use a Payday Loan For?
Really, it is up to you what you want to use your payday loan for. But to ensure you are borrowing responsibly, it is essential to understand what you should not take out a payday loan for. Unfortunately, many payday loans are taken out for the wrong reasons, leading the borrower to an uncontrollable cycle of debt. Here we outline the three sets of circumstances where you should never take out a payday loan.
Never Use a Payday Loan Pay Off Another Payday Loan.
Where you are struggling to repay a payday loan, it is never a good idea to take out another payday loan to pay it back. By taking out an additional loan, you add to your mounting debt rather than paying any off. Instead, the best course of action is to speak to your payday loan lender, who may be able to help you arrange a different solution. Reputable lenders will help you as far as possible and may even allow you to freeze loan repayments until you are in a better financial situation.
The alternative option is to borrow from a friend or family member – this should always be considered before taking out a payday loan. You can also seek advice from debt charities and debt management companies where you are having problems.
It is essential to note that a debt consolidation loan is not the same as taking out a loan to pay off another. A debt consolidation loan is a controlled way for those who have many sources of debt to make a single straightforward repayment. There can be additional fees involved in arranging a debt consolidation loan, so it is essential to analyse whether this will benefit your financial situation thoroughly.
Never Use a Payday Loan for Socialising or Entertainment
Using a payday loan for socialising or entertainment can be an easy trap to fall into, especially for young people. A big day out can be irresistible, and being able to access a big chunk of money the same day is a huge temptation. However, you should never use a payday loan for something that isn’t necessary. If there is even the slightest chance you can go without, do not take out a payday loan. Payday loans are designed for emergencies only or where you will lose more by not taking out a loan. A good example is where your landlord is threatening eviction if you do not pay your rent by a specific date. If you cannot get the money by any other means, you may consider taking out a payday loan. However, taking out a payday loan to buy yourself something extravagant, going on a holiday, or going out with friends is unwise.
Never Use a Payday Loan to Fund Addictions or Gambling.
Addiction is a severe problem and most often cause financial difficulty. Many people suffering from addiction use payday loans to fund their addiction, and unfortunately, accrue massive amounts of debt. In a recent survey, 3500 people of the 8000 respondents said they used a payday loan to pay for alcohol, tobacco or gambling. While it can be challenging to overcome addiction, it is essential to understand that using a payday loan will only worsen your problems.