You have likely heard of payday loans before and, if you’ve heard of them in the news, you may some misconceptions about them. Recent rules and regulations have made payday loans a good deal safer. However, as with all loans and financial agreements, they must be used responsibly.
Here, we are going to look at the advantages and disadvantages of bad credit payday loans. We want you to understand that they are not necessarily “bad” or “good”. They are a tool that can be very helpful but can also be greatly misused. Hopefully, you will be a little more informed on the truth of payday loans by the time you finish reading.
Advantage: Open to all
For most lenders, your credit is the key defining factor of whether or not you can borrow from them. If you have had trouble with missed payments, arrears, or a CCJ in the past, you may be flat-out rejected by many traditional lenders.
Bad credit payday loans, as the name implies, are designed to be accessible to those that other lenders will reject. There are still some criteria as to whether you will be approved. Good lenders will ensure that you have the income to repay it. However, it can serve as the only available option to those that don’t have the credit score to apply elsewhere, offering a vital lifeline in emergencies.
Disadvantage: Interest rates and APR
It would be dishonest to mention bad credit payday loans without bringing up the fact that they do, in most cases, have higher interest rates and APR.
The interest rate is a percentage that gets added onto your loan to show how much you will be repaying. The APR is the annual percentage rate, showing how much you repay in a year, including interest and any other essential fees. For instance, a one year loan of £500 with a 150% APR would see you repaying £750 to close the loan.
Banks and other lenders use credit to see how “risky” it is to lend to you. As a result, they have more assurance if you meet their criteria and can offer lower interest rates. Reputable bad credit payday loans providers will try to lower the interest and APR as much as is possible, but they are still higher in general than loans from traditional lenders.
It is worth noting that there is a new interest cap on payday loans. While they may be higher than traditional lenders, you at least know that lenders can’t raise it to whatever they deem fit.
Advantage: Fast and simple approval process
One of the most significant disadvantages of traditional lending is the length application process. Lenders like banks tend to require many more details from borrowers, and as a result it can take longer for you to be approved.
Payday loans allow you to state how much you need, provide a little proof of income, and then apply. This takes minutes where it might take a bank days, if not weeks. Processing is just as fast and, if you are approved, it will be no time at all before the money in your bank.
Disadvantage: Possibility of hidden fees
Some of the disadvantages of bad credit payday loans are not necessarily part of the experience but are common practice amongst the unscrupulous lenders that have given the industry a bad reputation.
One such practice is hidden fees. Every loan has fees, related to administration and other costs that the lender has to carry when processing a loan. However, certain payday loan providers don’t represent these fees fully and borrowers might be blindsided by them down the line.
To avoid hidden fees, trust more reputable lenders and ask about them. Lenders don’t have to be up-front about what hidden fees might be in their loans, but they do have to answer your questions honestly. There are deceptive lenders out there, but if you can prove that deception, such as by asking through email or recording the conversation, you can avoid a lot of danger.
Advantage: Can be much more flexible
Payday loans are, in general, short-term loans. This means that borrowers have to be able to repay them in a short amount of time compared to other loans. Most traditional loans will not let you repay them quite as quickly. Also, traditional lenders like banks won’t let you borrow amounts as small as you might get in bad credit payday loans. If you have a financial emergency or you need a little help until your next payday, you don’t want to be saddled with unnecessary debt. Payday loans can help you avoid that by letting you borrow only what you need to.
Disadvantage: May not be suitable for everyone
Many lenders will ensure that borrowers like you are able to make your repayments by asking for some proof of income and details of any other expenses and debts. However, if you are approved, it is up to you to figure out whether or not you can fully meet the repayments. If you can’t guarantee that, you should avoid payday loans.
Furthermore, payday loans should not necessarily be used for optional or lifestyle expenses like holidays. Due to their comparatively high interest rate, they are not suitable for loan consolidation purposes either, as they can end up increasing how much you have to repay. Use bad credit payday loans responsibly.
Advantage: Great for emergency situations
If you have sudden car repairs, higher bills than you expected, or your home is in need of urgent work, payday loans can be the best possible solution available on the market. You can borrow just as much as you need to, and not a penny more. What’s more, that easy application process and fast approval mean that you won’t be stuck waiting around weeks and weeks for the cash. Bad credit payday loans are designed specifically for those that need cash now.
Disadvantage: There are still bad lenders out there
There are new rules, including the interest cap, that make payday loans a safer option. However, as a borrower, it is essential you do what research on lenders that you can before getting into an agreement. As mentioned, some are deceptive and will use hidden fees or lie about aspects of their service. This isn’t necessarily legal, but bad lenders also tend to hide details about where they are based so that they can avoid getting caught.
What’s more, look up their reputation for how they handle the lending process and the collections side of things, too. Some of the worst will use highly aggressive and harassing tactics to force borrowers to repay and are well worth avoiding.
Advantage: Helps you build credit
Although bad credit payday loans show that you always have options, there is no denying that credit is important. If you want lower interest loans and more options in future, you want to improve your credit. Or perhaps you have been rejected from the banks because you have no credit history at all.
Bad credit payday loans can be your first step to building your credit history and improving your credit score. So long as you are able to make your repayments, you score should improve. There are no cash or credit penalties if you want to repay it earlier than the due date, either, so
no need to worry about that.
Disadvantage: Some lenders frown upon them
This isn’t true of all of them, but some traditional lenders, including some banks, do not look kindly upon clients that have taken payday loans. They can be seen as a sign of financial difficulty, even if you have only taken one and even if you have fully and successfully paid it off. As a result, these lenders may be disinclined to offer large loans like a mortgage, even if your credit would otherwise allow you.
Again, this isn’t the case for every bank and every lender. You will still have options out there after you have used a payday loan. It’s just a good idea to do your research to figure out whether a specific lender considers it or not.
Bad credit payday loans can be hugely beneficial. They can offer more flexibility to borrowers, as well as the chance to get cash where they have no other options. They can even help repair a bad credit score. However, that doesn’t mean they are without their risks.
Poor financial planning on the side of the borrower can make bad credit payday loans risky. This isn’t helped by the fact that there are still disreputable lenders who are willing to take advantage of borrowers and use some truly nasty tactics when they want to.
At Bonsai Finance, we want to make sure that our borrowers are as fully informed as possible, prepared to make the most responsible borrowing decisions, and that they know they are with a lender they can trust. Check out the loans we have to offer and see if we don’t have the right solution for you.