While payday loans are relatively cheap, they can damage your credit. Your repayment history is recorded on your credit report and any missed or late repayments are shown for up to two years.
This can make repeat borrowing tempting and could create a negative impression of your financial stability. The key to avoiding payday loan debt is to avoid repeat borrowing.
Repeat borrowing signals that you are insecure and may be in need of additional financial help. So, what are the advantages of payday loans?
Interest rates on payday loans are generally low
If you need money quickly, payday loans may be the answer. However, they are not without risk. Although interest rates on payday loans are generally low, they can cause a borrower to default on other payments, which may negatively impact their credit score.
Typical payday loans require borrowers to repay a lump sum of £430 on their next pay cheque, which is 36% of their gross monthly income. This financial situation can cause borrowers to fall into a cycle of borrowing money to pay back the loan.
According to a Pew Charitable Trusts report, 80 percent of payday loan borrowers take out another payday loan within two weeks of repaying their previous loan.
Lenders don’t rely on a credit check
While lenders don’t rely on a credit score to approve payday loans, a low credit score may be a sign of risk. If you don’t make your payments on time, you’ll have to pay collection fees and potentially lose your vehicle.
If you have bad credit, you may have trouble securing a loan from a family member or friend, but they don’t do a hard credit check.
They have a price-per-£100 fee
Payday loans typically charge a fee per £100 borrowed, with fees varying from £10 to £30. These fees vary depending on state law and the maximum amount you can borrow. The average fee is £15 per £100 borrowed, which equates to a 400% APR for a two-week loan. This means that a £300 loan taken out before payday would cost £345 to repay. This is clearly not an option for most people.
They are made based on the lender’s ability to collect
This practice may be a problem for those in financial need. Payday lenders typically don’t conduct credit checks on applicants and often make loans based on the borrower’s ability to repay.
This can be problematic because payday loans often have high interest rates and can become a dangerous debt trap. The proposed regulations would require lenders to check the ability of consumers to repay loans. If lenders can prove that they can collect on their loans, they should be able to continue lending.
They have a payment plan
The best way to make sure you have a payment plan with a payday loan is to find out how long you have to repay it. There are a few different options you should consider before committing.
One option is to look for a credit union that offers a low annual percentage rate. A payment plan will give you more time to pay back the loan before it affects your credit score. A third option is to contact a consumer credit counseling service. These organizations can help you understand your options and work toward your goals.