Posted by COVID-19 has halted global economic growth. The pandemic has gravely hit the UK job market and the consumer economy. The crisis was shortly followed by a long lockdown, due to which most businesses were unable to operate. This led to wage cuts and furloughs and, in the worst cases, layoffs, further crumpling our day to day cashflow. Despite the availability of government-backed support schemes, it has been challenging to sustain the financial crisis that followed the pandemic.
Not all of us have adequate savings to sustain ourselves. Many people with a low income may not have much left to save after their daily needs. Under such circumstances, people may resort to financial aid in high-cost short-term loans or cash advances. If you’ve been through a financial crunch like this, the chances are that you may have considered a payday loan.
Pay loans have a notorious reputation in the UK lending market, but is it justified? Read on to find out!
Finding the best payday loan for bad credit
Payday loans are high-cost short-term loans that people usually borrow as cash advance to cope with emergencies or unplanned expenses. You can pay off this loan within a week or a month, depending on the length of your repayment period. Payday loans are a common choice among people with a low credit score who seek a quick loan to cater to a minor financial crunch.
Payday loans or instant payday loans usually have a quick disbursal time – perhaps a few hours. From a borrower’s point of view, payday loans can be a quick and convenient option. However, these loans are entwined with additional costs and high-interest rates. It is essential to understand the cost breakdown of these loans.
The average APR of payday loans often exceeds 300%, with sky-high interest rates. To safeguard the interest of the consumers, the FCA capped payday loan prices. For every £100, the lender cannot charge you more than £24 for a loan with a term of 30 days. If you fail to keep up with your payments, the lender cannot impose a penalty of over £15, plus the interest on the loan amount. The price cap also ensures that you don’t end up paying more than twice what you borrowed.
After the FCA’s intervention, stricter regulations have been implemented. Plus, there has been a substantial drop in the number of payday lenders after the price cap on payday loans and other high-cost short-term credit options. Although, there has been a rise in the number of borrowers.
But, lenders who continue to provide payday loan services must comply with the FCA regulations to operate. Such lenders should work towards polishing the market reputation of HCSTC (High-Cost Short-Term Credit) providers.
Can I borrow payday loans for very bad credit without a credit check?
No credit check payday loans fall under the HCST umbrella. These loans are advertised as such to attract bad credit consumers. These borrowers are usually:
- Applicants who want to avoid hard credit checks which can further damage their credit rating
- Applicants with a poor credit score who fear that their credit score may hamper their chances of securing a loan
Lenders perform hard credit checks after you choose a preapproved offer. If a lender doesn’t carry out a formal credit check, it would in your best interest to not enter into a credit agreement with them. The FCA regulates payday loans. With that, each FCA compliant payday lender is required to run a hard credit enquiry into the borrower’s credit.
Lenders who advertise no credit check loans also carry out a hard credit check. The only difference is that these lenders may provide you with a loan despite a low credit score. However, no credit check payday loans have excessive interest, with the average APRs sometimes exceeding 400%. Moreover, there is no gauge on a borrower’s repayment ability.
Since most borrowers resort to payday loans because they need urgent cash, they may not have the opportunity to consider alternatives. Thus, they find themselves ensnared in the debt trap of payday loans. No credit check payday loans may seem like the ideal option, but you should check your affordability before deciding.
Should I borrow payday loans for bad credit on benefits?
You can borrow a payday loan with a low credit rating even if you claim benefits. Many payday lenders are open to applicants who claim benefits. But the downside to payday lenders is that they don’t properly assess the borrower’s repayment capability.
Will a payday loan affect my credit score?
Payday loans won’t usually harm your credit score if you make timely payments. Many payday loan lenders don’t report your payment history to credit bureaus, so they may not help you build credit.
However, some Credit Reference Agencies (CRAs) may consider a payday loan as a negative item, which can lower your credit rating. Plus, hard credit enquiries during application processing can also reduce your credit score for a brief period.
But since the assessment criteria of each CRA varies from the other, the impact of a payday loan on your credit report may be different in each case.
Alternatives to payday loans for really bad credit
- Cut back and save: Curbing your urge to spend unnecessarily is probably the best way to deal with a financial crisis. Plan out a budget to cut back on the extras and adhere to it sincerely.
- Consider a personal loan: A personal loan allows you to spread the cost of your expenses into affordable monthly instalments over a fixed span. Besides, unsecured personal loans don’t require collateral, making them a more viable option.
- Credit union: A credit union works like a financial co-operative wherein members of the union pool in their savings to help other members in need. Credit union offer loans at low-interest rates (roughly around 3%). However, a credit union only lends to its members, who have had savings with the union in the past. Find out more: https://www.moneyadviceservice.org.uk
- Use a credit card: Most credit cards have a 0% interest promotional period. This period can last anywhere between 1 to 2 years. As long as you pay your balance within this period, the credit provider will not charge you interest. However, there may be a steep rise in the interest rates after the promotional period expires.
- Learn more about authorized overdrafts: Most banks offer an overdraft facility. Authorized overdrafts also have high-interest rates but not as high as payday loans.
- Borrow from friends or family: Your close friends or family members may have some savings to lend to help you out through the crisis. Having a repayment plan will benefit both of you and save you from an awkward discussion.
Conclusion
HCST credit options have exorbitant interest rates. If you’re trying to move on from a debt cycle, borrowing a payday loan may push you further into debt. Weigh your options wisely to make an informed borrowing decision, or you may jeopardize your financial stability.
