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Payday Loans – The Limitations

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Small cash advances provided through payday lending are a form of short term loan. These loans are designed to help borrowers cover expenses until they receive their wages or salary. Payday loans do have limitations dictated by their terms and conditions, and by financial regulation.

Limitations of Payday Loans

While payday loans can be incredibly useful, they do come with a few limitations. Payday loan limitations include:

Payday short term lending is limited to small amounts, such as between £100 and £1000. Short lending terms are usually of around one to two weeks. Of course, in some cases, they may be borrowed for longer. By law, payday loan companies must clearly state their annual percentage interest rate (APR). However, there is no limit on the interest rates these lenders may charge.

To qualify for a payday loan, the potential borrower needs to demonstrate proof of employment and earnings. Those that are unemployed are limited by these criteria. Payday loans are established with the intention of providing individuals, who cannot obtain credit elsewhere, with solutions to cover bills that are due before they receive their pay. Unlike secured short term loans, which give options in larger loan amounts with more favourable rates, payday loans achieve one purpose – the covering of emergency expenses.

Unsecured Loans

Payday debts are unsecured short term loans, meaning that borrowers need not prove credit worthiness. There is a risk of entering a cycle of repeat debts that compound, worsening a person’s financial emergency status if affordability isn’t checked. But most payday lenders will perform affordability as well as credit checks.

In the UK, payday loans may be rolled over longer durations, substantially raising the cost of borrowing. Certain payday lending networks charge borrowers brokerage fees. Borrowers may be faced with limits on the amounts they may borrow or top-up via accounts online.

Where loan repayment is not made on the due date, payday lenders may attempt to withdraw the amount from the borrower’s bank account. This will often increase bank and loan charges. Default on payday loans may be recorded on a person’s credit history and be enforceable for a period of time under statute of limitation.

Due to these limitations and the higher costs of payday loans, payday loan alternatives – such as guarantor or secured short term loans – are becoming more popular. Secured short term loans differ from unsecured payday loans. Another person with a healthy credit history, called a guarantor, can stand security for a person applying for a short term loan.

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Payday Loan Alternatives

Massive APR rates, as well as high charges, have given payday loans a bad press and rightly so. Penalties for defaulting, increasing debts by rolling-over loans to the next month, and lack of responsible lending, leave customers caught in a never-ending payday loan trap. When you need funds in an emergency though, and friends or family can’t help, it’s often necessary to borrow. But where from? You might want to consider a different type of bad credit loan.

Keeping in mind that those who opt for payday loans generally have poor credit ratings, these individuals may not be able to get a cash advance via credit cards or use bank overdraft facilities.

Alternatives may include attempting to borrow small amounts of cash from family or friends, asking an employer for an advance on earnings, or finding other types of short term loan. 

Guarantor Loan

These enable you to borrow larger amounts, such as up to £5000, without any credit checks. As long as you have someone willing to guarantee the loan! However, there are pitfalls with this. You could jeopardise your friendship or a family relationship if you cannot meet a payment. If the loan is secured against the guarantor’s home, they could even lose their home. Only consider as a very last resort.

Banks

Banks will sometimes let you sign up for an authorised overdraft. If not, and you have a credit card, consider using this before taking out a payday loan. As long as you pay it off at the end of the month you will be paying less than on a payday loan APR.

Peer to Peer (P2P) Lending

A fresh approach to lending, P2P loans can offer short term funding for many purposes. The simple idea behind is to connect borrowers with lenders, and provide credit as well as savings income. Some P2P loan providers consider applicants with poor credit, so do your research first.

For a payday loan or short term loans, contact us for more information.