Payday loans have had a bad press. Until changes to the regulations governing them early this year, the popular press was full of lurid headlines about people getting into difficulties with them, extortionate interest rates and the practice of rolling the loans over where repayments were put back month after month and the amount owed continued to rise rapidly.
But payday loans are like any other form of lending – they are fine if you are disciplined about them, are confident that you will be able to repay one when it is due and don’t use them to fund things that you actually cannot afford.
While most of the headlines focused on the lenders, the responsibility for borrowing sensibly is shared between the organisation and the applicant. While lenders perform as many checks as they can to ensure that their customers are able to afford the loans, the borrowers themselves have a duty to ensure that they are not going to get out of their depth. And that is the same as it is for any type of borrowing.
Ensuring that your payday loan experience is successful and stress free depends on following some common sense rules:
- Don’t borrow more than you can afford
It may sound facile, but only ever borrowing what you know that you will be able to afford to repay is a fundamental tenet of any type of credit. When looking for a short-term loan, make sure that you know exactly how much you will have to pay back in a month’s time (or whenever the loan term is up). If the amount that you want to borrow is £200 and the total repayable at the end of the term is £250, then be absolutely certain that on the day concerned, you will be able to comfortably repay the £250. That means taking into account all of your other outgoings – rent, food, heating, electricity, other credit repayments etc. If you are not sure that you’ll have £250 to spare in a month’s time, then you can’t afford the loan and need to find other ways of funding whatever it is that you need.
- Never use another payday loan to pay off another
If you’ve got in over your head and cannot afford to repay the initial loan, then you’ve clearly failed to follow the first tip. The temptation in this situation might be to go looking for another payday loan to repay the first. But if you’ve borrowed £200 on the first one and now have to pay £250, getting a second one for that amount may mean that you’ll be looking at total interest payments of £100 or more just to satisfy the first debt. Don’t get into this position in the first place – it means you can’t afford a payday loan and need to take an urgent look at your financial situation.
- Don’t use payday loans to fund essentials
Payday loans were never created for the essentials in life – rent, food, heating, lighting, water, telephone etc. They are there primarily for emergencies; the unexpected things that come along when money is temporarily a bit tight. That means fixing the boiler, not paying the gas bill.
- Don’t use payday loans to buy luxuries
This is similar to the third tip. Payday loans are there for the unexpected, not to fund a lifestyle that you can ill afford. Their short-term nature makes them completely unsuitable for buying luxuries or large items that you cannot fund out of savings or longer-term forms of borrowing.
- Don’t rollover
The Financial Conduct Authority (FCA) changed the rules governing payday loans in January 2015. One of the changes governed rollovers – the practice of offering to defer the total loan repayment repeatedly which led many people to incur higher interest charges than they had originally calculated. The number of rollovers allowed has now been reduced to three but that doesn’t mean rolling over even this limited number of times is right for everybody.
Be clear about what you can afford to repay before you take out a loan – you shouldn’t apply for one thinking that it won’t matter that you won’t be able to repay it after the first month because you can just roll it over to another and then another. If you do that, you will be even less likely to afford the repayments on the rolled-over amount.
- Take a look at your financial situation
If you are regularly using short-term financing just to get by, then something is clearly not right with your situation. You may be simply spending more than you earn or your outstanding debts are becoming too large to manage. Either way, if you find yourself repeatedly taking out payday loans or other forms of short-term borrowing, you should sit down and work out exactly where your shortfalls are and do something to cut back. That means making a budget and sticking to it or perhaps looking at ways of increasing your income. If your situation is particularly difficult, then you should seriously consider seeking debt advice – perhaps from the Citizen’s Advice Bureau or a debt advice charity.
Everybody has borrowed money at some stage in their life – it is a perfectly normal thing to do in a modern society. So long as you are a responsible borrower and are not taking on more than you can afford, then payday loans are a useful and fast way to borrow money to cover the unexpected. As with any form of borrowing, realism and financial discipline are the keys to ensuring that your payday loan experience is a stress-free one.
Article provided by Solution Loans, a technology-focused finance broker with a wide range of products and many positive years of advising clients what their most suitable type of credit may be.