Payday Loans

Signing loan

One of the major benefits of payday loans is that they are not designed to be long term, they can be used by a borrower for as little as a day. They are not generally used for large amounts and if you are a first time borrower they will generally lend you less than if you are a repeat customer with a solid payment history.

How they are used

The loans are in some ways like bridging loans in that they are meant to act as a bridge for the borrower until the next payday.  There are not normally early repayment charges, which means that they can be useful for people looking to take out some quick cash who know they will be able to pay it back quickly.  Where the loans become problematic is when borrowers don’t pay the loans back on time, late payment charges are very expensive and is where lenders make profits.

Interest rates

Interest rates for the loans can be high, however they are for most forms of short term finance, take for example bridging loans or credit cards which both have high rates.  For borrowers who understand how much they are paying in interest and charges the loans can help them out of difficult situations.

Debts can grow to much more than the original balance if the loan is not paid off straight away.  If a loan keeps being increased because the original one can’t be paid off, the debt becomes high.  This is where borrowers find themselves having problems.  Interest adds up and late payment charges are added on to the balance, making the chances of the borrower being able to now repay the whole balance quite slim.

Reputation in the media

Payday loans have a bad reputation because of irresponsible lending by some lenders.  Proper affordability checks not being carried out was the most common reason for complaint, with borrowers being lent money they couldn’t afford.  Some lenders have been forced to cease trading because of these practices, and due to new regulation the current lenders have to be very strict about who they lend to.

With so much publicity about payday lending it has had both a positive and negative affect for lenders.  On one hand the publicity has raised the awareness of the loans, but on the other hand they are having to turn more customers away than they might have before.  This is positive however for the customer because borrowers aren’t in most cases being lent money they can’t afford and lenders are acting in a more responsible manner when it comes to dealing with them.  There is also more transparency for customers when it comes to their loans and the amount of interest they will pay, together with the potential charges they could face if they default on the loan.

One of the main reasons for the rise in payday lending is the convenience and speed of borrowing the money compared with other loans.  There is sometimes no difference between the interest rates on an overdraft that hasn’t been arranged from a High Street bank, and a payday lender.  In fact the bank may have other penalties that make them more expensive than a payday loan.

Concern about number of defaulting customers

Despite all this, the number of people in the UK who are struggling to pay back their payday loans has increased by 42% this year.  The biggest problem that payday loans seem to bring are the uncapped charges when borrowers fail to pay back the money on time.  The charity Stepchange is increasingly concerned about this and has asked the Financial Conduct Authority (FCA) to look into it further.

As with any type of short term loan, paylay loans need to be used with care and only when the borrower can afford them.  Interest rates are high and there are expensive charges for defaulting on the loans.   Caution needs to be used by both lenders and borrowers alike.

Credit Cards

 

Pile of credit cards

Most people are aware of what credit cards are. You apply for a card and once you have it can make purchases up to an agreed credit limit.

Cards are generally provided by large financial institutions and the competition is intense so there are nearly always plenty of offers for borrowers to choose from.

Interest free balance transfers

One of the most advertised of these offers are the 0% interest rate cards for balance transfers, purchases or both. A borrower can transfer a balance from one credit card to another and not have to pay interest on that balance for the offer period. This 0% period can be as much as 24 months or sometimes more. The availability of these offers depends on your credit rating, meaning that if your rating is poor, there is less chance of being accepted for a card.

Borrowing using a normal interest rate on a credit card can be very expensive. Savvy borrowers use cards to make purchases each month and then pay off the balance by direct debt at the end of the month. By doing this they are able to use the payment protection of using a credit card and also make use of the rewards that many card companies offer customers, such as air miles or vouchers.

Some borrowers use the 0% balance transfers to constantly move debt from one offer to another every couple of years.  This means they don’t pay any interest on the balance, apart from the fees they are charged for the set up of the card.  This can be a useful way to deal with debt that you are unable to pay off, but at the same time you need to make sure you are making dents into the debt as much as possible because you won’t be able to move the balance to new cards forever, you will eventually run out of offers.

Minimum payments

Problems arise for credit card borrowers when they just pay the minimum balance back on a credit card with a high interest rate.  This will take a long time to pay the loan back and the amount of interest they will pay could possibly outstrip the amount that was originally borrowed.  It has always been said that it is best to pay back chunks of the debt whenever possible, in order to reduce the interest rates and pay off the remaining balance.

It isn’t advisable to use credit cards for large purchases because the temptation is always there to pay back the minimum amount each month.  With other forms of personal loan the payment amounts are not controlled by the borrower.  This means that you have to pay the amount each month, rather than being easy on yourself and using the money for something else.

Most people don’t like having debt hanging over them and the problem with credit cards is that they do offer the temptation of delaying paying back the loan quickly.  Depending on how you manage the balance the debt could be kept for many years without being paid off.

Another temptation for borrowers is to take out lots of credit cards and have balances on all of them.  Obviously this can become very tricky financially, having to juggle monthly payments between all cards.  Most financial experts don’t recommend this as an effective way of borrowing money.

In recent years companies have been punished by regulators for not conducting proper affordability checks on credit card applicants, allowing people to borrow more money than they can afford.  This has in theory led to more responsible lending, however it is always down to the individual to monitor their own borrowing levels to ensure they are reasonable.