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With so many options already flooding the market for financial emergencies, most of the people turn down the payday loans. This financial product has gained formed a negative image in the minds of individuals. The situation in the payday lending landscape got so worse that the Financial Conduct Authority (FCA) had to intervene to introduce a price capping system. The capping on High Cost Short-term Credit (HCSTC) has somehow reshaped the lending industry and practices to an extent. The exorbitant interest rate i.e., Annual Percentage Rate (APR) that is levied on these loans made an impact on the consumer borrowing behaviour and pattern. Moreover, a few people who defend and support this financial product hold a notion that because these loans are unsecured – the lenders are willing to lend money to the borrower, despite bad credit, that means the lender is taking the risk. The borrower may default on the loan and the lender cannot recover the money. Let us explore the 5 reasons that make people avoid a payday loan.
#1 Incredibly Expensive
The sky-high rates of interest make it an extremely expensive financial product. However, the FCA implemented a cost cap of 0.8% per day that means the interest and fees charged on the loan must not exceed 0.8% per day. In addition to that, the borrowers will pay a maximum of £15 on default fees. And, borrowers will never pay more than 100% in interest and fees of the amount they have borrowed. These pricing caps helped shaped the industry. Individuals now can borrow payday loans without getting exploited by the astronomical rates.
#2 Poor Credit Score Gets Affected
Individuals who do not have a spotless credit history, often search for Payday Loans for Bad Credit. A few lenders offer such loans but they do charge a high rate of interest. As they take on more risk by lending to someone who has a risk of defaulting on the loan. So, if you have a poor credit score and you’re considering to take on a payday loan, you should rethink of other alternatives that may help you. If you are sure that you can make the repayments on time and in full, only then you must consider taking out a loan or else you might find yourself trapped in a debt cycle.
#3 Spending Increases
With the dotcom boom, we can easily find anything with just a tap of our finger. This is the reason why most of the brick and mortar lenders have shifted their business online. The easy and convenient access to cash may lead us to spend more and save less. It may prove to be the unhealthiest factor for our finances. If you really want to stay on the track, you need to control your spending. The more you spend, the chances of collecting debts also increase.
#4 No Budgeting
Borrowing money means you have not prepared a budget to support your finances. And if you keep borrowing on top of that, it will not allow you to prepare a budget. A planner and spending tracker are the essentials to shape your personal finance. Lack of budgeting often leads to mismanagement of money and you end up adding to the pile of debts. It also affects your credit score, and with time, lenders will consider your profile to be risky. And they may turn down your application altogether.
#5 Other Affordable Alternatives Available
The market is full of options that allow you to borrow money at an affordable rate. Over the years, a lot of big players of the payday industry are going burst by entering into the administration. After the collapse of Wonga, and The Money Shop, recently, QuickQuid also shut down. In case of emergencies, you can rely on credit cards, credit unions, Community Development Finance Institutions, or you can always contact your bank for an authorised overdraft.
What are the Benefits of a Payday Loan?
Payday loans have gained their name when private lenders started providing short-term loans to people and the repayment was done the next month when the borrower received their paycheck. Later when lenders started charging high rates of interest, the customers started getting into the debt cycle and soon, Britain was known as the nation of debtors. To eliminate this tag, the financial watchdog came up with a lot of new policies that did shape the industry in a better way. Payday loans are short-term loans that generally allows you to borrow £100 to £1,000 for a period of one year. The major benefit of this financial product is it allows the borrower to repay the loan in easy monthly instalments. You can spread the cost of repayments over several months. To get through an immediate financial crisis, these loans have proved to be quite handy and convenient. Also, timely repayment of this loan helps you build the credit score.
The Bottom Line
Mounting concerns surrounding the payday lending industry led the policymakers to introduce and implement certain restrictions to uplift consumer sentiments. Consumers are an essential part of our economy who drive the output and development of a nation. Adopting new financial regulations to safeguard consumer interest has gained consumer confidence. Payday loans are no longer the most dreaded financial products with all these necessary regulations in place. However, it depends on the borrower to make timely repayments to stay on the top of their finances and to protect their score.
