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When and how to avoid payday loans
Are you looking for information on how or when to avoid taking out a payday loan or emergency loan? The good news is that even when finances are tight, there are still lots of ways you can get by without having to borrow money at high cost. But how exactly can you achieve this?
The first step is to try and make small positive changes to your approach to finances and your overall lifestyle. It’s possible to avoid taking out small loans by making smarter decisions on how to manage the cash you’re left over with after you pay your bills. By doing so, you might even find that it’s possible to improve your level of financial freedom without having to ask for a pay rise from the boss or look for alternative sources of income.
In this article, we’re going to look at the best ways to avoid payday loans, and when to do so.
Create a budget
Your first step to avoiding payday loans should involve putting a monthly budget together. This will help you to live within your means.
When you are careful with money, you’ll be able to stretch your finances much further. In addition to this, you could even find yourself in a position where you can put money aside for life’s little emergencies.
While it can be tempting to take out a loan designed for people with little to no credit, you should remember that this is just a temporary fix – you’ll still have to pay that loan back with interest on top. Sure, you might get the money you need precisely when you need it, but it means you’ll have less to live on in the months it takes to pay it back.
Instead, you should begin creating a monthly budget to allow you to live comfortably within your means. Here’s how you can do it:
1) Write down your sources of income
When you log into your online banking, you’ll easily be able to identify where you receive money from. For example, you might have money coming in from one or more of the following:
• Monthly salary
• Freelance work
• Rental income
• Second job income
• Student loans
• Tax credits
When you add the amounts of each of these sources of income together, this will provide you with your overall monthly income.
2) Identify your expenses
Now that you know how much your total income is, it’s time to figure out your expenses. To do this, you’ll want to list any household bills and other regular outgoings, such as:
• Rent or mortgage payments
• Money you place into savings accounts
• Other investments
• Credit card/loan repayments
• Utility bills
• Travel costs (bus tickets/petrol money etc.)
• Insurance payments
• Subscriptions to services (television, streaming services etc.)
• Phone bills
• Gym memberships/recreational spending
You should include all bills which regularly appear on your online banking statement and add the total of these outgoings together. This total can then be subtracted from your total regular income (see step 1) to provide you with your discretionary budget. This is the spare cash you’ve got left over to spend on socialising, holidays, clothing and other one-off purchases.
Avoid impulse purchases
Everybody loves to make a spur-of-the-moment purchase – but the amount you could save by avoiding this could surprise you. For example, let’s imagine that you purchase a coffee from a high-street café chain every now and then. When you add up how many times you do this over the course of a year, you could find that you’re spending in the region of £1,000 per annum – just on takeaway coffee!
Likewise, you might find yourself taking advantage of a supermarket “meal deal” on your lunchbreak. Seems like good value, right? Not when you work out that you’re spending over £1,000 on lunches every year.
By preparing your own lunch and coffee, you could cut these expenses in half.
The best way to avoid impulse purchases is to create a 30-day list of items you can purchase with your discretionary budget. For convenience, you should keep this list on your smartphone and update it often.
If you need to buy something that’s not on your list and it’s not going to put you under any financial strain, you might feel like it’s fine to treat yourself – and that’s fine. However, try holding off for as long as you can, as you may suddenly decide that you don’t need that new dress, video game or tablet after all.
Of course, it’s not always possible to avoid impulse purchases – particularly when you’ve got your heart set on something. If this is the case, try to shop around. See if you can find the item you want (or a similar one) in a sale, or perhaps try shopping online for the best possible deal.
In fact, online shopping makes perfect sense – this is because retailers often put pressure on you to close the sale before you’ve even had the chance to consider whether you really need an item or not.
Look for ways to increase your income
Why not ask your boss if there is any overtime available at your place of work? If you work weekdays, you could always increase your wage by doing the occasional weekend or evening shift in addition to your existing rota pattern.
Do you have a creative hobby? If so, have you ever considered that you could use your talents to make extra cash?
For example, if you play the guitar and sing, why not approach local cafes, bars or restaurants to see if there’s an opening for providing entertainment on the evenings/weekends. You could find that your passion for music could help you to earn a little more as and when you need it, thereby allowing you to avoid the payday loan trap.
Likewise, if you’re crafty, you might find there’s a market for your creations online. Sites like eBay and Etsy are perfect for selling everything from home-made greetings cards to textiles – why not take a look and see if you could supplement your income this way too?
Alternatively, you could look for freelance or part-time ad-hoc work to help boost your finances when you’re in need of funds. There are lots of agencies offering casual work – and by taking on a second job, you could even increase your social sphere, push yourself out of your comfort zone and meet new people.
Spend less on Christmas and holidays
Most of us have a hard time when it comes to avoiding going overboard at Christmas/on holidays. According to recent research, the average family will spend more than £820 at Christmas, and even more when it comes to overall summer holiday spending. While it’s important to celebrate good times with family and friends, it’s equally important to ensure that your spending doesn’t get out of hand.
Do you finance your Christmas/holiday spending through a combination of the following?
• Credit cards
If so, you should ensure that you begin repaying any of the debt you have accumulated as soon as you feasibly can. This will help you to cut down any interest owed on the debt through the course of the year, which means you’ll have more expendable income.
Like everything else, it pays to shop around during Christmas and during the summer holiday season. Look for cheap package holiday deals and perhaps consider holidaying out of season. Speaking of which – you might also find it cheaper to do your Christmas shopping a few months in advance, before the shops are in full festive mode.
Use comparison sites
A great way to reduce the amount you spend is to use comparison websites. These sites are easy to use – simply enter your personal details and you’ll receive the best possible deals on:
• Subscription services
When you use these sites, you might discover that it pays to switch suppliers. Lots of companies concentrate on getting new customers, instead of rewarding their existing ones. It’s genuinely possible to save hundreds of pounds over the course of a year simply by switching your gas and electricity suppliers.
Set financial goals
Setting a financial goal involves budgeting on a larger, long-term scale. For example, you might decide that your financial goal involves the elimination of your debt over the next 12 months.
Paying off debt is a great way to rebuild your credit score. With each repayment you make, your score will improve. This means that the next time you really need to access finance, you will find that greater numbers of companies are willing to offer money over longer periods of time – and at better interest rates than before.
Debt repayment is also important because for every piece of debt you eliminate, your monthly discretionary budget increases since you are paying less in interest. Even if you can’t realistically clear off all your debts this year, you should do what is possible and aim to be debt-free in as short a period as possible.
Why you should avoid payday loans
There are lots of reasons to avoid short term loans, payday loans and emergency loans. Payday loans come with incredibly high interest rates, which can make paying them back incredibly difficult. If you can’t pay back a payday loan on time, you could end up spending more in interest. In addition to this, your credit score will deteriorate further, which could mean that you’ll struggle to access finance in the future.
Payday loans aren’t great for your credit score full-stop. Other lenders might look at your credit file (for example, when applying for a mortgage) and notice that you’ve taken out lots of emergency loans in the past. This suggests that you need to rely on credit simply to get by. This can be a sign that your debt is spiralling out of control – particularly if you’re using one form of loan to simply to pay back the interest on another.
Why to avoid short-term credit
Short-term credit is expensive. While short term lending solutions typically don’t allow you to borrow large sums of money, you’re expected to repay what you do borrow with a large amount of interest.
Instant online loans should only be used for emergencies you could not have predicted, such as an unexpected bill or to fund repairs to a vehicle or essential household appliance.
Here are just six things to consider about short-term credit:
1) Are your circumstances likely to change?
If you think your current circumstances could soon change in a way that could make meeting your repayments more difficult, you should avoid taking out a short-term loan. Examples of a change in circumstances include:
• Having a child
• Moving home
• Undergoing healthcare treatment which means you cannot work
• Having to renew your insurance
• Experiencing an increase in rental/mortgage costs
2) Are you really facing a financial emergency?
If your car or washing machine breaks down, are you really facing a financial emergency? Could you take the bus or use a launderette until payday, when you could pay for repairs out of your discretionary budget?
Short-term lenders are set up to help people in emergency situations – however, statistics from the Debt Advisory Centre show that less than half of payday loans are taken out to cover emergencies. Up to a quarter of emergency loans are used to fund holidays or other treats.
It’s important to remember that short-term payday loans aren’t designed to help you make frivolous purchases.
3) Could you borrow from family/friends?
If you’re facing a financial emergency, why not see if a relative or friend can lend you the money first? This is nearly always better than taking out a payday loan.
Friends and relatives usually won’t charge any interest – neither will they take you to court if you miss a payment here and there. If someone you know can lend you money, it’s likely that their terms will be more flexible than those of a payday lender.
However, these sorts of arrangements can put a strain on relationships. If you find yourself struggling to pay the money back, be certain to keep your friend or relative informed.
4) Do you need to borrow a large sum?
If you need to borrow more than £1,000, you might struggle to find a payday loan provider to help you. Most payday loan companies prefer to hedge their risks and lend only in small amounts. While some may be willing to lend out more than £1,000, they’ll only do so to good customers who have previously made repayments in full and on time.
When you need access to large amounts of cash, it can be tempting to take out loans from several different payday lenders. This is inadvisable, because juggling the repayments could become difficult – particularly if you must make several different repayments over the course of a month.
If you need to borrow more than £1,000, you should consider approaching a building society or bank instead – although please be aware that a lot of traditional lenders are only willing to work with borrowers who have high credit scores.
5) Are you borrowing to pay off existing debts?
If you’re borrowing money to service your existing debts, this is a clear warning sign that you’re entering a debt spiral.
A debt spiral is a situation where you are unable to pay off your current debts, regardless of how hard you work. Over time, your overall debt also increases. If you are taking out payday loans to cover the interest on things like car finance, overdrafts or credit card bills, you may want to speak to a debt charity.
Debt charities are experienced in working with those struggling to get out of the debt spiral. These organisations can offer advice, which could include entering into an Individual Voluntary Arrangement, applying for a Debt Relief Order or filing for bankruptcy.
6) Can you access cheaper forms of credit?
If you can access more affordable forms of credit, an online payday loan might not be the right financial product for you. While applying for an expensive emergency loan might be convenient, it’s not affordable in the long run.
Ultimately, if you can access cheaper forms of credit (such as credit cards or overdrafts) you should use those first. However, you should do so with caution, because it can take years to pay off credit card debt if you only make the minimum monthly repayments. Likewise, if you enter an unauthorised overdraft, you could end up paying your bank a lot more than you’d originally anticipated.
If possible, you should avoid taking out payday loans. Instead, you should focus on making the most of your finances each month by creating a water-tight budget and being prepared to shop around for the best possible deals.
It’s surprising how some small changes to your attitude to spending can help you to take back control of your finances. With some simple budgeting and a little bit of hard work, you might find that you’re able to have more to spend on the things that can make life that little bit more enjoyable.