Consumer groups and professional debt advice services have long been concerned about payday lenders. Vulnerable groups of society, many of whom have bad credit, and are on very low incomes, are often forced to turn to payday lenders as a last resort. Currently, more than one million people in the UK are borrowing from payday lenders to cover everyday essentials such as food and household bills. This can lead to debt becoming a way of life.
Payday lenders offer short term loans for under £1000, normally over 31 days, with the option to roll-over the debt. So although an initial loan may be harmless, extending the loan increases the size and cost of the loan leading to a snowballing debt situation.
Payday loans are very simple to apply for. Having a poor credit record is no barrier, because defaulting means that payday lenders can profit from the hefty charges and fees applied to the loan. For this reason, payday lenders should be used only if absolutely necessary, and not as a long term money management solution.
However, if you have no choice, and must borrow from a payday lender, then it’s wise to choose the safest. We’ve set out a few things to consider, in order for you to make the safest choice:
Does the lender allow you to borrow regardless of your income and circumstances?
Any lender who allows you to borrow money without considering your financial situation or making credit checks is an irresponsible lender. This means they are unlikely to be sympathetic to any problems and simply want to exploit the situation. If you do have a bad credit record, try and find a lender who will allow those with poor credit to apply, by also looking at the individual’s circumstances in addition to the credit record.
Is there an early re-payment penalty?
Many lenders will charge a fee for an early repayment of the loan. Always make sure that a lender will allow you to save money by making an early repayment if possible.
Do they allow loan roll-overs?
Again, a lender who allows a borrower to extend their loan, is simply enabling the customer to ramp up their debt, whilst increasing the lenders own profits.
What is their policy on repayment defaults?
A responsible payday lender will ideally have a policy on how they deal with customer’s who aren’t able to repay. Check the small print for an indication of this. Some lenders will be sympathetic to customers who genuinely cannot repay on time, while others will sell the debt straight on to a collections agency.
Finally, it’s worth remembering that although APR rates are high, they are spread over the year and so don’t reflect the real costs of short term borrowing. So borrowing from a responsible short term lender to avoid being hit with a fee for non-payment of another debt can sometimes work out as the cheaper option. As always, do the maths first.