Payday loans are one of the most innovative credit products in consumer finance. Sometimes it becomes challenging to manage your regular expenses if you encounter a financial emergency in the middle of the month. Although these loans provide the borrower short-lived liquidity gain, it has its own set of risks. A Payday Loan is also termed as ‘High-Cost Short-term Credit’ because it comes with a high rate of interest as compared to the other forms of borrowing. Lack of money can often derail the regular lifestyle that may hamper your mental health as well. You must understand the benefits of this credit product along with the associated risks that will help you in making an informed decision.
Benefits of a Payday Loan
There are various advantages of this HCSTC if you know how to use it responsibly and wisely. A few significant benefits are listed below:
The method of applying for a short-term loan is more agile as everything happens online. There is no need for standing in long queues to get a loan. You can apply for a loan sitting at the comfort of your home. You have to fill the loan application form online and submit it so that the lenders can assess your creditworthiness to make their decision.
Improves Credit Score
If you make repayments on time and in full – your credit score will get a boost gradually. A good credit score will always get you loan offers with low rates of interest. That means you can save some money if you have a positive payment history.
These are 12 month loans that typically allow you to borrow an amount from £100 to £1,000. You have to make the repayments within a year in monthly instalments. Payday loans are quite handy and useful if you have short-term financial needs.
Associated Risks of a Payday Loan
There are two sides to every coin. It is no doubt that a payday loan has numerous benefits to offer its borrowers. However, there are some risks involved with this credit product that are listed below:
High Rate of Interest
Generally, a payday loan has a high rate of interest. It doesn’t require you to put up any of your valuable assets as collateral to borrow a loan. Therefore, the lender takes the risk of lending you money without any guarantee. Due to this reason, the rate of interest offered on these loans is higher.
Potential Debt Spiral
If you fall behind the repayments and you end up not repaying the loan – you may get tempted to borrow another loan to pay off the previous one. That may lead you to enter an endless debt spiral, and it becomes difficult to get out of it.
Online Payday Loans are easy and convenient to apply. As a borrower, you must be responsible or else the consequences can be harmful to your financial fitness. Before borrowing a loan, evaluate the total amount you need and know how much you can afford to repay without any fail. Draft a budget and stick to it for making regular repayments. Go through the Terms & Conditions offered by the lender before agreeing legally.
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