Most people know about payday loans. Well, at least, we think we do. In reality, a lot of myths are floating around about them and some could be doing potential borrowers more harm than good.
While people should use them responsibly, there are some cases where payday loans could be your only solution. This is why you must understand what payday loans are and what they’re not so that you can make a level-headed decision about them. Let’s take a look at some of the common myths and misconceptions about payday loans, and who would be a perfect candidate for them.
“Payday Lenders Go After the Vulnerable”
One of the reasons why so many people have a bad opinion about payday lenders is that they see them as predatory. And to be perfectly honest, this opinion was warranted before the FCA started regulating the industry more tightly. There was a time when untrustworthy payday lenders used to give loans to people they knew wouldn’t be able to pay just so they could pile up the fees.
With the regulations that are in place now, lenders have to be more responsible about who they award loans too. Borrowers are also more empowered than ever now that they have so many choices right at their fingertips.
Brokers like Payday UK, for instance, allow customers to apply for direct payday loans right from the comfort of their home. These services will connect you with a panel of market-leading lenders and help you get the best rate possible on your loan. There is also no fee associated with their service and no credit inquiry will be made, meaning that your credit score won’t be affected.
“Payday Lenders Are Constantly Trying to Hide Something”
Another misconception people have about payday loans is that lenders use tactics to hide fees into their contracts. But again, this is where the FCA was able to strike down and make things clearer for borrowers. Payday lenders now have to be much more transparent about the total fees of a loan and interest. This includes late and rollover fees. Borrowers also have to be made aware of their rights when taking out one of these loans.
“Payday Loans Are for Poor People”
There’s also this stigma that payday loans are for poor people only. But there are many other cases when someone may need one. One of them is people who didn’t have the time to build their credit. They might have a solid income, but can’t get a credit card or a loan through a regular financial institution.
Another thing that sets payday loans apart is convenience. Some people like the idea of being able to access credit in 24 hours or less, something that is pretty much impossible through your average bank.
“Interest Rates on Payday Loans Are Exorbitant”
While it is true that payday loans will often have higher interest than traditional loans, they also imply more risks. Still, there is a limit on the amount of interest payday lenders can charge. APR can’t go over 100% and you can bring that percentage down depending on who you work with.
Also, lenders aren’t allowed to charge more than 0.8% per day on interest. This means that if you borrow £200 over a period of 30 days, you won’t pay more than £48 in interest.
So, Who Are Payday Loans For?
At the end of the day, payday loans are targeted for people who don’t have assets they can put up as collateral and don’t have the credit necessary to get a loan through a traditional financial institution.
They are for those who can prove they have a steady source of income that can cover for that loan. Payday loans should only be taken out by people who are responsible financially. Having a good relationship with a payday lender could pay back dividends later on. You could get better rates or have your applications processed more quickly. However, if you burn bridges with them, you could find yourself in a lot of trouble and have no more options left.
This is why you should be aware of the fees and understand how the lender handles rollovers. Understanding how these work will be essential in case you’re having trouble repaying. These loans should also only be taken as a last resort. Last, but not least, you have to make sure that the service or lender you borrow from is fully authorised and in good standing.
The truth is that a payday loan can be a good financial instrument if you have exhausted all of your options. It’s also a good choice if you haven’t had the chance to build a sufficient credit history or need fast credit for an urgent expense. You should still be careful when choosing one and make sure that you’ll have the discipline needed to use them as they’re intended.