Small cash advances provided through payday lending are a form of short term loan 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
Payday loan limitations include:
- Smaller loan amounts.
- Shorter loan repayment periods.
- Higher interest rates.
- Emergency payday funding.
- Proof of employment and earnings.
- Restricted top-up amounts.
Payday short term lending is limited to small amounts, such as between £100 and £1000, with short lending terms of around one to two weeks, or longer in some cases. By law, payday loan companies must clearly state their effective annual percentage interest rate (APR), however, there is no restriction on the interest rates they may charge. Increasingly, people from low-earning backgrounds or with poor credit ratings are seeking payday loans to meet monthly expenses.
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.
Payday debts are unsecured short term loans, meaning that borrowers need not prove credit worthiness and may enter a cycle of repeat debts that compound, worsening their financial emergency status. 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, increasing 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 in that another person with a healthy credit history, called a guarantor, stands security for a person applying for a short term loan.
Payday loan alternatives
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 a credit worthy guarantor to guarantee a short term loan. Guaranteed short term loans offer borrowers more flexibility and cost-savings in loan amounts and terms.