Payday loansoffer a small amount of moneyfor a short term. Though itoriginally started off in the United States, payday loans have been penetrating the markets of the United Kingdom since the last five years at a fast pace. In UK, payday loansare usually money lentup to £500that is repaid within a short span of time or on the next payday. Usually a payday loan in UK per month costs around £25 for every £100 that is borrowed.
Payday loans are essentially loans:
i.For small amounts
ii.Those are due in the next payday
iii.That requires the borrower to give access to the checking account or provide the lenders with an assurance check of the full borrowed amount
Payday loan regulations laid down by the UK Government
As per the Consumer Credit Act 1974, in order to offer credit, loan lenders must have avalidlicence issued by the UK Office of Fair Trading (OFT).
With respect to interest rates levied by the lenders on the payday loans, there are no restrictions at present. However, the UK government is making a new legislation to cap the maximum costs of payday loans.
The Advertising Standards Authority (ASA) regulates the advertising of payday loans. Hence, in cases where it receives complaints, the ASA can take action against the payday lenders.
Currently the Financial Conduct Authorityis the agency that controls the financial firms.
Comparison between credit cards, bank loans andpayday loans
The tenure of repayment is short.
Amount borrowed is smallto medium.
You can use credit cards to make purchases such as a vehicle, pay bills or to travel.
The annual percentage rate (APR) charged on credit cards can vary anywhere between 0% and 40% based on the credit score.
Only persons with a decent credit score are eligible for credit cards
Repayment terms while using a credit card is little flexible as there is a period of 56 days that is interest-free as long as you settle the total bill.
Credit cards offer better protection of the money invested while making big purchases as even the credit card company is equally held responsible to refund the amountlost in a bad sale
The decision to go in for a debt is yours, it alters the course of life, and you belong to the debt rather than the debt on you, as the quotes ring in the years. Less said is more in case of going for Payday loans, as we think it to be a lifesaver, there is something more to it when it comes to the repayment. As a short-term cash advance there is probably more lenders today who are constantly on the prowl to debt trap people who need money for a very short term, usually, it is 14-day paycheck period.
They are designed for short-term and unplanned expenses, ranging from $50 to $1000 that are relatively easy to get, the interest rates are high, and borrowers have to be careful so that the loan does not get rolled over to the next paycheck date continuously
How does the Payday Loan work?
Eligibility to get Payday Loan
The credit history is an important criterion to get a payday loan; however, there can be some relaxation given by the lender as this form of lending is not highly regulated and anyone above the age of 18 years can avail the loan, based on the repayment capacity of the borrower. In case of a lower score in the credit report, there are specialized lenders who charge a higher rate of interest.
Why Is Payday Loan Risky?
Today more Lenders to give Payday loans at the storefronts than coffee shops, the rising inflation, economic struggle with the rising gap between the monetary value and purchasing power, these debt traps are very high in interest rates
There are usually two side approaches to the credit score being affected with the payday loans, if the loan is applied then there will be no impact in the credit score, however in case of any default there will be a report to three credit agencies that will adversely affect the credit score.
In spite of borrowing a Payday loan, the repayments can be simplified by consolidating the loan and reducing the interest charged, there is an option of moving all the different accounts into a single account significantly lowering the interest and also reducing the risk of lowering the credit score.
Avoiding Payday Loans
The quest to borrow money and take care of expenses will always lead to something bigger and impactful rather than limiting the expenses and save in small amounts for the future expenses.