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Pros and Cons of Payday Loans

Pros and Cons of Payday Loans
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When it comes to taking out a payday loan, you should try and weigh up the advantages and disadvantages first. While a payday loan may be the best option for some people, it may not be a suitable choice for others. To help you get started, we’ve looked at some of the pros and cons of payday loans below. But before we discuss the benefits and limitations, what exactly is a payday loan?

What is a Payday Loan?

While you may have heard of payday loans, you may be uncertain as to what makes them different to other types of short term credit. A payday loan is a form of loan where you only borrow money for a short period of time – typically a few days or weeks – and then settle the balance in one lump sum payment. As the name suggests, this would normally be on your next pay day.

Most other forms of short term loans allow the borrower to pay over monthly instalments. This means that you can spread the cost of borrowing. However, as the loan is taken out over a longer time period, generally this results in the borrower paying back more interest overall.

Benefits of a Payday Loan

Perhaps the main advantage of a payday loan is that they are usually very accessible. Taking out a loan with a more traditional lender, such as a bank, can be more difficult for people with a bad credit history. But with a payday loan, many short term loan providers will consider your application even if you do have a poor credit score. Such lenders understand that your credit history won’t always be an accurate reflection of how you manage your money, and will look into your affordability as much as your creditworthiness.

Another benefit of a payday loan is that, because the loan will only be open for a short space of time, you probably won’t pay back that much interest overall. For example, a loan of £100, borrowed for a week, would typically cost around £5 in interest. With most longer term loans, while the percentage of interest may be lower, as you’ll almost certainly be borrowing more money over more time, there will be more interest overall.

It’s also good to keep in mind that payday loans can actually help improve your credit rating. If you haven’t taken out much credit previously, you may not have much of a credit footprint. This means that lenders can’t see how you manage your finances, and you’ll probably have a lower credit rating. The same is usually true for people who have made late payments towards their credit commitments in the past. But if you take out a payday loan, and make the repayment on time, this can help build up your credit score.

Limitations of a Payday Loan

When it comes to the limitations of a payday loan, the first thought that comes to mind for most people is the high interest rates. Typically, payday loans, like most unsecured loans, have higher interest rates than other forms of credit. Because there is no collateral with an unsecured loan, there is more risk for the lender, therefore the rates are normally higher. With a secured loan, the lender instead has the option of repossessing your collateral, such as a car or home, if you were to default on the loan.

Another limitation of a payday loan is that you can’t spread the cost of repayment. The nature of a payday loan is that you’d pay back the money as a lump sum, rather than in instalments. This often means that payday loans are for smaller amounts, which may not be able to cover your emergency expenses. In such instances, a short term instalment loan would probably be a better option.

Find a Payday Loan With a Broker

One of the best ways to find a payday loan is through a broker service. We do all the hard work for you, comparing lenders and doing our best to put you in touch with a suitable loan provider. Rather than spending hours researching and making countless applications, looking for the right lender, you can simply use a broker service instead. Our online application shouldn’t take more than a few minutes to complete, and you should get a loan decision incredibly quickly.

It’s also important to note that applying through a broker such as My Financial Broker can help improve your chances of loan approval. This is because when you apply for a loan with lots of different lenders, that will typically mean that lots of hard credit checks will be carried out. These are reported on your credit file, which can lower your credit score. So by completing our application, where only soft checks are carried out, and one application with a lender, you can protect your credit score and boost your chances of getting a payday loan.

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