With the current economic climate, it’s no surprise that payday loans have become an increasingly popular option for those in need of emergency funds. With this quick way of getting hold of that extra money you need, it can be tempting to apply for one the moment you start to struggle, but more thought needs to be put into such an action – after all, while there are benefits associated with payday loans, there are just as many risks and knowing whether or not to apply for one should take careful consideration. Here, we’re exploring what you need to know before deciding whether a payday loan is right for you.
What Is A Payday Loan?
Knowing exactly what a payday loan is, is the first step to working out whether it’s the right choice for you. At its essence, a payday loan is a short-term loan that you’ll usually need to pay back within two weeks usually on, you guessed it, pay day! The amount you can take out will usually depend on your usual income and various other qualifications, but this is rarely higher than £1,500-£3,000. In fact, payday loans are usually on the lower end, with a couple of hundred being a standard loan depending on what the money is needed for. At Wizzcash, our maximum loan rate sits at £1000.
Interest Rates And Fees
Understanding the fees and rates related to payday loans is extremely important when it comes to borrowing. The FCA took over regulatory duties in 2014, and as a result, they introduced a number of new financial regulations in order to stabilise the payday loan market. In the past, the payday loan industry built up a reputation for numerous fees, so in order to protect the public, the FCA implemented payday loan price cap regulations. These price cap regulations were implemented in 2015, and ensured that moving forward, payday loan customers never had to pay back more than double the amount that was borrowed. The three main regulations put in place by the FCA include:
- A maximum daily interest of 0.8% per day
- Maximum default fees capped at £15
- Maximum total cost of a payday loan capped at 100%
Your Credit Score
FCA regulations have also implemented the requirement for lenders to assess the creditworthiness of every customer, prior to them entering into a credit agreement. This means that your credit score will be taken into account when it comes to applying for a payday loan from a reliable, FCA authorised and regulated lender. However, your credit score is not likely to be the deciding factor, as this will also depend on the amount of money you are looking to borrow, and your personal circumstances.
However, once your application is accepted by the lender, rates are likely to be the same as any customer the lender is willing to lend to, regardless of your credit score. Nevertheless, your credit score may impact whether or not your application is successful in the first place. A responsible lender will not lend more than you can afford, and your credit score could have an impact into their understanding of your financial history and how much you are paying out monthly currently. For example, you may be looking to borrow £500, but the lender may only be prepared to lend you £300.
When Should You Take Out A Payday Loan?
As we said, payday loans really are there in the case of an emergency. If you are in need of a little extra cash as a result of a financial emergency, then these short-term loans can be an option. Payday loans are designed for emergency situations where you need money fast. Once approved, the funds can be received a few hours after approval, depending on the lender, so time-sensitive emergency situations really are one of the most common reasons people apply for payday loans.
Paying It Back
There is a different criterion for different payday loan lenders when it comes to repaying your loan, and it is imperative that you repay in accordance to what was initially agreed prior to taking out the loan, otherwise your credit may be affected. In the case of Wizzcash, you may pay back 3 equal amounts over 3 pay day months, however if you are in the position to, you may want to consider paying back your loan early.
There can be serious financial implications when it comes to non-payment so make sure you keep this in mind prior to applying. Only take out what you can afford to pay back, and avoid taking out a payday loan if you know you can’t pay it back within the time scale.
Overall, payday loans are an option for those in a financial emergency. They can be helpful in covering time-sensitive costs until your next pay day, but it’s also important to take into account the risks involved. Ultimately, only you can decide whether a payday loan is something that you can afford and something you want to take on.
Generic advice is not a service regulated by the Financial Conduct Authority.