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What To Know Before Applying For A Payday Loan With Bad Credit
9 Sep 2018

What To Know Before Applying For A Payday Loan With Bad Credit

When you know that your credit score isn’t in the best possible shape, every financial application you make can cause you concern. This can be incredibly stressful, as a bad credit score can often mean that many financial options simply aren’t available to you.

It should therefore be somewhat reassuring to know that if you are in need of a payday loan, then there are suitable options for you to pursue. Payday loans, after all, are designed for emergencies, and emergencies can impact anyone. If you are in need of a quick source of funds to meet an unexpected expense, knowing that there are companies that can supply a loan is incredibly reassuring – but that feeling of relief shouldn’t overrule good financial prudence.

Before you submit an application for a bad credit personal loan, it’s important to pause and consider a number of pertinent facts and realities. If you ensure you know all of the points below prior to making an application for a bad credit personal loan, you can be confident that the process will be as smooth as possible…

#1 – You have to know you are borrowing for the “right” reasons

There are good and bad reasons for wishing to obtain a payday loan. Here are examples of good, viable reasons:

  • You have received an unexpectedly large bill and do not have the funds available to pay it.
  • Your fridge breaks and you have to pay for it to be repaired
  • You discover you need to travel to visit someone who is unwell and cannot fund the trip from your usual budget

Here are the “bad” reasons for needing a payday loan:

  • You need to use the payday loan to pay a standard expense such as your telephone or water bill
  • You are going away for a weekend and need extra spending money
  • You want to treat yourself

As you can see from the above, payday loans should only be used for unexpected costs that you have to pay. Payday loans can become problematic if you continually use them to supplement your income. On a one-off basis when you need money to cover a short-term, unforeseen blip, they can be useful.

So before you submit your application, run through your motivation for applying for a payday loan and make sure you are applying for “good” reasons. If you are applying to meet gaps in everyday expenses or for other “bad” reasons, then you may be better off considering other financial products that are more suitable for your needs.

#2 – You have to know how you are going to manage your finances next month

When you apply for a payday loan, you agree to pay it back in a short space of time. As the name suggests, payday loans were originally conceived to be paid back on your next payday. Modern payday loans do not always stipulate this point. However, the vast majority of loan agreements are of a similar nature. For example, analysis has shown that the average length of a payday loan term in the UK is three weeks, and the loan is paid back in a single installment.

When you are faced with an unexpected expense and no other way to pay it, the chances are you will immediately assume that you’ll be able to pay the loan back as quickly as stipulated. At the time of the application, your focus isn’t on next month – it’s on getting through this month, and to do that, you need a payday loan, so you may feel you’ll accept whatever terms you need to accept to obtain one.

This, however, is dangerous, and particularly if you already have a poor credit history. Before you apply for a payday loan, you have to think about how you’re going to balance your budget next month. This is where things can get very difficult, for example:

  • You have an unexpected expense – a “good reason” – that has lead to you needing to take out a payday loan for £500.
  • Statistics show that most people who take out payday loans earn under £1,500 per month, so let’s say you earn £1,500.
  • Your usual expenses each month – rent or mortgage, bills, food bills – equal £1,200.
  • The month after you take out your payday loan, you will be paid £1,500 as usual…
  • … however, you will have your usual expenses of £1,200 plus the £500 loan amount to repay.
  • This means your finances next month will actually be -£200.

If your credit score is already poor, experiencing the above scenario is extremely problematic. The reason you are applying for a bad credit payday loan is likely due to the fact that more conventional short-term borrowing is not available to you due to your credit history. This will still be the case the next month, so how would you cover your the negative £200 you are set to incur the month after your payday loan?

#3 – Know that it’s far too easy to overlook interest

Above, we have provided a breakdown of how the finances of payday loans can play out – but did you notice that there is something missing? Probably not – and this is an issue that befalls many people who obtain payday loans: it’s all too easy to forget about the interest when calculating what you will repay.

With a payday loan, if you borrow £500, you’re not going to be paying back £500. You’re going to pay back the original £500 and then the interest on top. The rate of interest you pay will vary. It could, however, easily be as much as £750. So, to alter the example above to truly reflect what will happen the next month…

  • You will earn £1,500 as usual.
  • You have your usual expenses of £1,200, as well as the payday loan repayment plus interest and fees of £750.
  • So your actual negative for next month is minus £450, not minus £200.

Did you overlook the interest in the initial calculation in point two? Don’t worry, you’re far from alone; interest is easy to forget about in the midst of the application process. However, such an oversight can really disrupt your finances for the next month. You have to be certain you have included the interest when considering your future finances.

Thankfully, there are ways and means of negotiating a budgetary shortfall the next month. You could borrow less, arrange for a longer repayment term that is manageable for you, or just squeeze your budget by planning to spend less on your grocery bill for the next month. Either way, it’s important that you decide how you will manage the repayments before you actually apply for the loan. While you are probably applying for a bad credit payday loan when in need of funds right now, it’s important to remember that the future will roll around. Your finances will have to stretch to pay the money back – and that that repayment includes interest, too.

#4 – You have to know that the lender you are applying to accepts applicants with bad credit histories

Thankfully, this should be fairly simple to achieve. Lenders that do provide payday loans to people with bad credit tend to advertise the fact. It’s highly unlikely you will be left guessing – the information will usually be front and centre on their website. You can further guarantee to only be applying to companies that accept applications from people with bad credit by using Bonsai Finance’s specific bad credit payday loan comparison tool. You can be sure every company we list here is willing to accept applicants with poor credit histories.

The reason this is so important is due to a quirk in the way that personal credit files are compiled. When you make any application for credit, it leaves a marker on your credit file that shows a search of the file was conducted. This is all the marker shows; the mark is neutral rather than being positive or negative – it just a mark that a lender ran a search.

Unfortunately, if you have too many of these search marks on your credit file, it can negatively impact your ability to access credit. Too many searches of your credit file too close together is taken as a bad sign by lenders, and it’s easy to see why: if a person is making numerous applications for credit in a short time scale, then this implies a sense of desperation rather than careful and considered borrowing choices.

It is important to keep all of this in mind if you have a poor credit history and are now making an application for a payday loan. If you apply to a company that does not accept applicants with poor credit histories, then you are effectively placing a search marker on your credit score for no reason – because the company in question is always going to decline the application. This is something to be avoided at all costs, so try to ensure you only apply to companies where you have a chance of acceptance.

#4 – You have to know what the consequences are if you cannot repay

We have already discussed the need to examine and structure your finances so that you know you are going to be able to pay back the loan – with interest! – at the agreed date.

However, no matter how well you plan and budget for next month, you also have to be realistic: you can’t control everything. It is possible that you could do everything as you should; you apply to the right company, you work out your budget for the next month, you remember to factor in the interest… and then the next month rolls around, and you can’t repay the loan as you expected you would be able to.

No amount of planning can control extraneous circumstances that may influence your ability to repay. It is therefore important to spend a moment prior to application researching the big “what if”, and ascertaining what happens if you can’t repay as you expect.

The answer to this question very much depends on the company. Some companies may fine you for missing the payment date; others may allow a late repayment date in exchange for a higher interest rate. Some companies have their own unique procedures for dealing with missed payments. Whatever it is, you need to know about it, and you need to have a strategy in mind to cope with such an eventuality.

In all likelihood, if you have planned correctly and remembered to factor the interest rate into your repayment, you won’t need this backup plan. However, if something does go wrong and you can’t repay your payday loan as you expected, you will be extremely glad to have a backup management plan for such a scenario already in place.

#5 – You have to know acceptance is not guaranteed

Payday loan providers for people with bad credit tend to advertise their high acceptance rates. This is understandable; with so many lenders refusing to even consider lending to people with poor credit scores, the companies that are more open-minded have to be upfront to help distinguish themselves.

However, this constant talk of high acceptance rates can cause issues in regards in overly-high expectations. Ultimately, lenders will decide whether or not they can provide a payday loan on a case-by-case basis, and there is no way of knowing prior to applying whether or not they will accept you.

So while you can hope for a good outcome, it’s important to try to remember that a positive outcome is not guaranteed. The mysteries of why companies sometimes decline people are just that, mysteries – and you can’t ever expect that an application for a payday loan will be accepted. Hopefully it will, but a little expectation management will stand you in good stead.

In conclusion

When you have taken the time to ensure you know all of the above, you should be able to proceed with your application for a payday loan with confidence in the process. You can begin this process right here at Bonsai Finance, where you can compare payday loan providers with ease. Just remember to keep the tips above in mind as you go through the application, and you should be able to find the right payday loan for your needs and circumstances.