What are the dangers of payday loans?

While the relief of getting a cash advance as and when you need it cannot be compared to anything else, the trouble sets in when a person is unable to repay the loan as expected. For a long time, payday loans have earned the negative reputation of making individuals to be worse financially than they were when they first took the loan. It is perhaps for this reason that most financial experts advise against taking payday loans unilaterally. A payday loan should be in response to a serious financial emergency and not just for the fun of it. In light of this, what are the dangers of taking out payday loans?

High renewal fees

One of the dangers of taking out a payday loan is that an inability to pay means two things: one, you have to take a new loan to clear your already existing debt or two, you have to renew or rather roll over the existing loan. The effect is that you have to contend with renewal fees which further make the cost of the loan expensive. The more the loan is renewed, the higher the burden of repayment and at times, a person might find themselves finally paying off twice the principal amount.

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Negative impact on credit score

Ordinarily, payday loan lenders don’t put great emphasis on a person’s credit score prior to approval. What this simply means is that those with a less than stellar credit rating can easily apply and get approved. However, with the high-interest rates and high probability of defaults, a person can further worsen their credit score. Defaults and missed payments negatively affect credit scores which essentially means that getting approved for a loan or even a phone contract in the future might prove herculean.

Debt cycle

You probably have heard of the term debt trap or debt cycle. A situation whereby you are trapped in a never-ending cycle of debt. Your meagre earnings cannot meet your loan together with interest and so you resort to borrowing more or renewing your loan over and over to an extent where you are so deep that getting out becomes a problem. This debt cycle is dangerous and if not checked, can lead someone to file for bankruptcy.

 

Automatic deductions

If there is something unsettling about payday loans, it has to do with the fact that the borrowers can deduct money owed to them from your bank account when the loan matures. In most cases, the borrower gives the lender permission to automatically deduct the money owed from their bank accounts. The downside is that if there is no cash in the bank account on the appointed day, the borrower will have to deal with hefty bank fees not to mention penalties from the borrower for missed payments. The end result is that you end up getting deeper into debt!

 

 

 

 

Who commonly uses same day loans and why?

Millions of UK citizens take out a payday loan annually. For a long time, the assumption has been that same day loans are unilaterally taken by low-income earners in the UK. While this is true to some extent, it would be foolhardy to hold that opinion. Even those with a decent income at times find themselves in a financial quandary and resort to payday loans. Be as it may, the reality of the matter is that there are a clique of individuals that commonly take out same day personal loans in the UK. Who are they?

Young UK citizens

Young UK citizens in their early 20s all the way to their early 40s take out more than 50% of payday loans. In fact, UK citizens between the ages of 25 to 44 have at least applied for one same day cash advance in their lifetime. Payday loan applications are common among UK citizens in this age group as compared to those who are 60 years and above.

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Renters

The fact of the matter is that individuals who rent are more likely to apply for a same day loan as compared to those who own houses. With the high costs of living and the need to pay bills on time, renters commonly use same day loans as compared to individuals who own homes. In fact, at least one in every 10 renters have applied for a same day loan in their lifetime.

Disabled or unemployed

Individuals with a disability or unemployment benefits are the favourite of most same day loan lenders. In fact, payday loan lenders have no qualms cashing in on the benefits of the disabled or the unemployed. For this reason, most individuals under disability or unemployment benefits tend to resort to same day personal loans when the going gets tough.

Low-income earners

Those earning low incomes find it difficult making ends meet. They essentially live from one paycheck to another and therefore to get through to the next payday, they resort to payday loans. The reason for applying for a same day payday loan could be to meet day to day expenses or simply to repair a broken car. Whatever the case, low-income earners form the bulk of individuals that commonly use payday loans.

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Relatively uneducated people

Granted, a substantial number of individuals apply for same day loans out of ignorance. Those who dropped out of high school are more likely to take a same day loan as compared to highly educated individuals.

Ways in which same day loans are different from regular bank loans

As you probably know by now, making ends meet can be a tad difficult especially with the high costs of living, shaky job market and squeezing of incomes. Lower income earners  therefore, find themselves in a difficult spot. They live from pay check to pay check and any financial emergency leaves them greatly exposed. So what do they do in such circumstances? They resort to same day loans to get access to small amounts of money needed to repair a car, a garage door, fix a leaking roof or simply pay off a bill that can’t wait. Ever wondered how different same day loans are from traditional bank loans? If you answered yes, you’ve come to the right place as we are just about to shed light on the differences so you can best make an informed decision.

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No credit checks

Ordinarily, banks run credit checks before your loan application can be approved. The purpose of the credit check is also to help banks determine how much they will charge you for a particular loan. The same cannot be said of same day loans. In essence, same day loan lenders do not put much emphasis on a person’s credit score but rather approve loans based on a person’s income. So long as you meet the basic requirements, you do not need to have good credit to qualify.

Smaller amounts and shorter terms

Same day loans allow you to loan smaller amounts usually not more than 1000 pounds. This amount of money is generally expected to be repaid on the next payday and this essentially means that most same day loans last for 2-4 weeks after which the borrower will need their money. As compared to bank loans, the amount advanced by same day loan lenders is relatively small and the period relatively short.

High-interest rates

The fact of the matter is, the interest rate charged on the amount you borrow from a bank is largely dependent on your credit rating. What this simply means is that the higher your credit rating, the lower the interest on your loan. The same cannot be said of same day loans that are known for charging astronomical interest rates hence making this type of loan dangerously expensive especially to low income earners.

No instalments

It should be noted that bank loans are required to be paid in instalments. For instance, if you borrow say 3000 pounds for a period of one year, you will repay a determined amount of money on a monthly basis until you clear the loan together with the interest. With same day loans, there are no instalments as the money owed to the lender usually matures within 2 weeks and automatically is deducted from the borrower’s accounts.

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Automatic deduction or repayment

One of the things you do when taking out a same day loan is that you sign a document giving the lender the power to automatically deduct the money owed together with interest from your bank account. The lender, therefore, has the permission to automatically deduct the balance from your bank account or cash the check you wrote to them without having to notify you on the day the loan matures. With traditional bank loans, that is not the case. If you default on a number of occasions or you are unable to repay, the bank usually confiscates your collateral.

Renewal is a walk in the park

If there is something interesting about same day loans, it has to be the fact that renewing the loan is quite easy. If you feel that you won’t be able to repay the loan as initially agreed, you can always approach your lender for renewal of the same. However, the downside is that you end up paying exorbitant fees and if you are not careful, you might actually find yourself deeper into debt.