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When should you avoid cash loans?
The majority of the time, cash advice websites are full of bright ideas to help you find new and different ways of accessing credit. For most people, it’s simply a lack of information holding them back from their next loan, and they just don’t realise that there are a few simple things that they can do to make themselves a more attractive credit prospect. However, in some cases, there is a good reason why someone is finding it difficult to access credit, so it’s genuinely better to avoid taking on more debt. So when should you think twice about going for that next loan, and what can you do instead? Let’s take a look.
You have other options
While many people seek short term credit options like payday loans and small loans because they have been denied opportunities for finance in the past, for some the attraction is more around the ease of access and the speed of approval. Payday loans are often as easy to get via a quick online application form, and the money can be in your account in as little as a few hours, which can be very attractive to someone who is concerned about credit checks or needs the money quickly.
While these are undoubted benefits of payday loans, in many cases these positives are outweighed by the negatives of extremely high-interest rates. Unfortunately, payday loans might be the only option for people who have bad credit and are not good candidates for loans from traditional lenders, but for the majority of people, it is a far better option to choose a traditional loan. For a start, the interest rate is almost guaranteed to be considerably lower, making the loan much less expensive in the long term. As a result, it will be more affordable on a per-loan basis, and you’re much less likely to default on your loan and become trapped in a spiral of problem debt. While the apparent flexibility of a short term loan may appear attractive, the low numbers really just lull you into a false sense of security, and you would still be better off borrowing more over a long period of time.
Even if a traditional loan isn’t an option, a credit card or an arranged overdraft could still both be better and less expensive options than a payday loan as long as you pay them off at the end of the month (as you should with a payday loan anyway). Always remember that payday loans were originally created as an emergency, last resort method of finance, and it is only recently that they have been marketed more widely for consumer use. As a result, unless you have no other choice, traditional forms of finance are almost always better for you.
There’s no emergency
It’s all in the name really, but payday loans were originally designed as a safety net for people who found their wage wasn’t stretching from one payday to the next. Whether it was because of a fine, an unexpected expense or charge, or a bill that came in higher than anticipated, payday loans were designed to be used sparingly and as an alternative to missing a payment on something. There’s no great harm in payday loans if they are used with care, but many debt charities now report that more than half of payday loans are used not to cover emergency expenses, but expenses that are just out of reach because of budgetary limitations or difficulty accessing traditional finance. Unfortunately, using short term loans in this manner is a slippery slope to problem debt, especially if several small loans are linked together to make up a large loan, as the cumulative interest attracted is often crippling.
As a result, it’s vital to remember that short term loans should only ever be used in an actual emergency, and should be left alone if there is an alternative. If you can wait a few months and save for the thing you want, can borrow from friends or family instead, or can simply do without it entirely, these are all much better options. Of course, everybody is hit by unexpected emergencies that they can’t anticipate, and some people genuinely need payday loans to make up the gap. This form of borrowing is perfectly acceptable. But it’s important to be honest with yourself and to stop yourself from making a potentially serious mistake.
A pattern is emerging
We’ve already explained that everyone finds themselves in difficult financial situations they couldn’t have predicted every once in a while, it’s just a fact of life. And in those situations, there’s nothing wrong with taking out a planned and controlled payday loan for a specific expense, but it’s important to prevent payday loans from becoming a regular fixture in your financial landscape. If you find that the payday loans you are taking out are actually to fulfil regular commitments, not the odd emergency, then you may be veering towards problem borrowing. This type of borrowing can crop up unexpectedly too: a new baby stretches your finances, reduced hours or a lost job result in lower income, or you simply fall into a habit of spending more than you should. However it happens, payday loans are not the answer to this type of issue.
As has already been stated, payday loans were never designed for regular use, with the high-interest rate being a featured designed to guarantee a profit for lenders who would only expect to make few small loans rather than many large ones. Using payday loans to plug regular gaps in your finances, then, not only racks up serious charges in terms of your interest but also runs the risk of spiralling into problem debt as a result. In these cases, it is always better to find some other way of meeting your needs, whether that’s reducing your spending or finding an alternative source of income, or even trying to get the money you need on a traditional long term loan.
You’re already in debt
While it’s not a good idea to indulge in any of the behaviours we’ve been through so far, by far the worst way to use payday or cash loans is to fund the payment of an existing debt. While you may have heard of options such as consolidation loans, in which you take out a larger loan to pay off several smaller loans, this is only useful if you are reducing your monthly payments by combining several interest payments into one. This is very unlikely to be the case if you’re using high-interest payday loans to do this. Instead what tends to happen is that payday loans are used to make the minimum payment one month, and so next month you have to find the minimum payment again but now you also have to fund the payday loan on top. As a result, it can be tempting to get a larger payday loan to pay off both these amounts, and then in the third month, you have three payments to make, which is more than twice the amount you originally couldn’t pay.
Given this pattern, it’s easy to see how someone can go from one innocent short term loan to a vicious spiral of debt that sees you not only unable to pay what you owe but also adding to the debt so it becomes even worse. This will inevitably lead to an untenable situation that may result in financial and legal penalties or even bankruptcy, so it’s very important that borrowers stop the rot before it even starts.
You want to borrow large amounts of money
One of the positive things about short term loans is that it’s difficult to borrow large amounts of money, and in fact, it’s often the reason that they are able to offer loans to people with bad credit. In fact, few short term loans companies will offer more than £1000 in one go, but it’s not uncommon for people to attempt to build larger loans from several small ones. There are also other kinds of short term loans that are more of a bridge between payday loans and traditional loans that can last as much as a year.
While these don’t attract as much interest as payday loans, they’re not nearly as cheap as a traditional loan is. They attract the same benefits as a payday loan in the sense that there is a great deal of control over the cost and length of the loan, but there are also potential negatives. For example, the higher interest combined with several instalments greatly increase the likelihood that a borrower will default on one of those payments, something which can further damage their credit rating and lead to more debt.
What’s the alternative?
It’s easy to say that short term loans are a last resort, but what can someone do to avoid having to use them as they’re buffeted by the usual financial problems that most families go through from time to time? Here are a few things you can do to ensure that you’re never without a choice of options. The first and generally best option is to realise you may be facing a problem and to rein in your budgets to a manageable level by tackling your spending. This can be as easy as creating an ‘in-comings’ and ‘outgoings’ table for a sample few months that can be used to predict when your spending is taking you close to the wire, and finding ways to cut back where you can. This will ensure you never get into a position where you genuinely don’t have enough slack in the budget to accommodate the odd emergency.
Another way you can help yourself is by boosting your credit rating. While this won’t put more pounds in your pocket straight away, what it will do is make you more attractive to lenders so you can get traditional loans at good rates of interest without having to rely on short term alternatives. You can do this by trying a couple of simple things like making sure all the details such as names, dates of birth and past addresses are correct. This will make the credit agencies more sure you are who you say you are. Getting yourself on the electoral register, even if you don’t vote, is also a good plan because it’s Government confirmation that you are really you. At the harder end of the spectrum, paying down any existing debt is a sure-fire way to improve your score. Credit agencies like it when you use as little of the credit available to you as possible, so it’s always a good plan to try and use less than 50% of what you could borrow in loans, on credit cards and personal finance.
While short term loans and payday loans have their place in the overall financial mix of anyone’s life, it’s a fact that they’re not for everyone. Used properly and for their intended purpose, they can be a much-needed lifeline for people for whom other forms of credit are out of reach, but they can be a very expensive and potentially damaging form of credit if used in the wrong way. The best thing to do when considering using short-term finance is to consider all of your options carefully before you take the plunge. Is there any other way I can get the finance I need? Do I really need to make this purchase and are there ways I could cut back or save in order to achieve the same outcome? These are all good questions to ask. And while it may still be that a short term loan is the best answer to your questions, it eliminates the possibility that you’re making a mistake that could leave you in worse financial straits.