You may have heard about a few of the disadvantages of payday loans, such as their higher interest rates when compared to long term loans. But will you really be paying back that much more interest overall? As the loan terms are much shorter, this is not always the case.
There are many other benefits to taking out a payday loan too, such as being more accessible, and potentially helping to improve your credit score. So if you’re weighing up the pros and cons of payday loans, we’ve listed some of the main advantages and disadvantages below.
Payday Loans for Very Poor Credit
One of the main advantages of a payday loan is how accessible they are. If you’ve applied for a bank loan, or something similar, you may have been turned down due to your credit rating. But payday lenders understand that your credit score is not always a true reflection of how you manage your money.
As negative marks on your credit file can stay there for a number of years, your credit score may be lower due to something that happened years ago. Often, these things are outside of your control too. Difficult life events, like losing your job or long term sick leave can cause you to fall behind on your commitments, and it’s hard to then catch up. You shouldn’t be penalised for such circumstances. That’s why payday lenders put more weight on things like your employment history and expenses than your credit score.
Payday Loan Soft Search
When it comes to taking out loans, lenders will either perform a hard or soft search on your credit file. This means that they will either leave a footprint, or there will be no record of the search. Most lenders do perform a hard credit check, but as discussed, payday lenders tend to be more concerned with factors like your income and expenditure than your credit score.
It is important to keep in mind though, that too many hard credit checks in a short space of time can damage your credit rating. So making lots of loan applications to see whether you’ll be approved isn’t always a great idea. In these instances, it’s better to use a credit broker. Most brokers, like My Financial Broker, will only undertake a soft credit check. The broker will then put you in touch with the lender most likely to approve your loan application, based on their lending criteria.
Another factor to consider when it comes to your credit file is that payday loans can help improve your credit score. If you haven’t taken out much credit, or have a few late payments on your credit file, borrowing money and then making the repayments on time or early can demonstrate that you are able to manage your money well. Lenders are then more likely to consider your loan applications in future.
Payday Loan Interest Rates
Many people consider the interest rates of payday loans to be their main disadvantage. Some lenders offer payday loans with an APR of over 1,000%. This makes it sound like you’ll be paying back more than 1000 times what you borrow. But this simply isn’t the case.
APR stands for Annual Percentage Rate, so is the amount of interest you’d be paying back over a year. As payday loans are only borrowed over a couple of days or weeks, APR is not a good representation of how much interest you’d be paying. A lot of payday lenders offer a rate of 0.8% per day. So if you were to borrow £100 for 7 days, you’d pay around £5 in interest. You’ll probably end up paying far less interest overall than you would with a long term loan. This is because you only pay interest on the time the loan is open for.
- One of the main advantages of a payday loan is that all types of credit history are considered. Even if you have bad credit, as long as you’re in a position to comfortably make the repayments, you should be eligible for a payday loan
- Most lenders will perform a hard rather than soft search on your credit file. But less importance will be placed on your credit score for payday lenders than more traditional lenders
- You may end up paying less overall interest with a payday loan, as you’ll be charged a daily rate and probably won’t be borrowing the funds more than a few days or weeks
- One of the simplest ways to get a payday loan is to use a broker service, who can put you in touch with a reputable lender
Easiest Payday Loan
If you have an emergency expense, you’ll almost certainly need to cover the costs as soon as possible. So you’ll want an easy online application. You’ll probably want the lender to pay out the funds by the next business day too. Thankfully, with a payday loan, most lenders will provide these services. The only issue is then finding a lender that will definitely approve your loan application.
A lot of people use broker services to help speed up the process. Rather than make endless loan applications, comparing the interest rates of each lender, we can do all the hard work for you. You can use My Financial Broker’s completely free service to be matched with the most suitable lender for you.