Loan Security: Why Should You Be Cautious of Payday Loans?

Debts have become a common thread in our society in recent years as more and more of us have felt the pinch of the pandemic. But while loans can be an ideal way to take charge of your finances, they can also leave you in even more debt if you take out a bad loan. Such is the controversy surrounding payday loans.

But are payday loans as nefarious as the media would have you believe?

What are payday loans and why do they have such a bad reputation?

Payday loans are so-called as they are engineered to be short-term and paid back on the borrower’s payday. The interest then tends to accumulate over time.

While they are a fast and easy way to get the money that you need ASAP, the interest rate applied to payday loans is often incredibly expensive. Often, these are predatory loans engineered toward desperate people. Of course, they can be helpful in times of need, but they can also start a spiral of debt that will just get worse and worse.

Generally speaking, you should only take out a payday loan if you are 100% sure you’ll be able to pay it back on time. If you still want to go ahead, check first that the lender is approved by the Financial Conduct Authority (FCA), as if it’s not then it could be a scam lender. On the other hand, there are several other loan options to consider.
Payday loan alternatives

Bad credit loans – Don’t let the name put you off. All that’s meant by a bad credit loan is that they apply even to those individuals who might generally not be accepted for a loan due to their credit status. Having bad credit doesn’t necessarily mean you are in debt. You might simply have never taken out a credit card before. If so, taking out a bad credit loan can be the most realistic and effective solution.

Personal loans – Personal loans are generally offered by banks as a way of giving customers instant access to cash with a relatively low-interest rate. It’s usually for a relatively low sum (under £10,000) and it is completely up to the borrower to fulfil the loan repayment obligations. Note, however, that you will generally need to pass a credit check to apply for a personal loan.

Home equity loan – A home equity loan allows you to take out a percentage of the equity remaining in your home. You don’t need a particularly high credit score to apply successfully for this and APRs are quite high. However, if you are a homeowner with a relatively expensive home that you still have a decent mortgage left to pay, this could be a decent option.

Family and friends – Finally, taking a loan from your friends or family members means there’s no interest to pay but it can lead to fractures in your relationships if they go on for too long.