According to the Financial Conduct Authority, a quarter of adults in the UK have less than one week’s income in savings. At the same time, the average credit score in the UK is only just considered ‘fair’.
Put these two pieces of information together, and you can see that there are millions of people who are one emergency away from a cash-flow crisis and would find it hard to borrow from a bank if they needed to.
Fast loans offer easy-access, short-term loans at very high-interest rates. While they can be a convenient solution for people with a short-term cash flow problem, there is a long list of risks associated with this type of borrowing.
This is where fast loan providers come in: they are far more likely to accept people with bad credit scores and will usually deposit much-needed cash into an account within hours of an application being made.
However, if you’re not careful, jumping into an agreement with a fast loan lender could leave you in worse financial shape than you were in, to begin with.
Different Types of Fast Loans
Fast loans cover a whole range of agreements which allow people with bad credit to borrow small sums of money at short notice.
Here are just some of the most common form of fast loans available in the UK today:
Fast Loans: Payday Loans
These are offered by high street and online providers. You can apply for up to £1000 (the most common amount borrowed is £100) and usually need to repay the money within the month- on your next payday.
Payday loans are typically paid out on the same day as the application and some services even boast that you could have access to money within 15 minutes of starting your application.
Fast Loans: Personal Instalment Loans
These are similar to payday loans, but have a higher borrowing limit (usually £2000) and are repaid over a more extended period of time. Like payday loans, many providers offer same-day cash.
Fast Loans: Logbook Loans
Logbook loans are available to car owners in England, Wales and Northern Ireland and to use the borrower’s car as security for a loan. The lender can offer up to 50% of the car’s value and becomes the legal owner of the vehicle until the debt is repaid. You continue to use your car as normal, but if you fail to repay the debt, the loan provider sells it on.
Fast Loans: Pawnshops
Pawnbrokers have been around for centuries, but remain a popular way to borrow cash for people with bad credit. If you want to borrow money from a pawnbroker, you offer some of your possessions as security. In exchange, the pawnbroker gives you a fraction of the items’ value in cash.
The broker then keeps hold of your items for the term of the loan. If you don’t repay the loan with interest, the pawnbroker sells your items.
The Dangers of Fast Loans
Extremely High-Interest Rates
Fast loans are notorious for their high-interest rates, which can make repayments unaffordable.
Even though Financial Conduct Authority (FCA) introduced a cap on interest rates and fees back in 2015 (meaning customers should never pay back more than twice what they borrowed), fast loans still live up to their bad reputation for shockingly high-interest rates.
According to the UK’s Money Advice Service, the average APR of a payday loan is 1500%, compared to just under 23% for a conventional credit card.
This means that if you borrow £100 on credit at the average APR of 22.8%, you pay £1.83 in interest per month, whereas a fast loan customer pays £25 per month. Not only is this a bad deal, but if you rollover on your loan (more on this below) you could end up paying hundreds in interest over the year.
Fast Loans: Short Repayment Terms
Fast loans normally have a repayment term of just a few weeks, leaving you very little time to repay the amount you owe. Given that you’re likely to take out a fast loan when you are already broke, you could struggle to find enough money to make the repayments.
Fast Loans: Recurring Payments
One way that lenders try to ensure they are paid back is by setting up a ‘recurring payment’ on your bank account at the start of the loan. This allows the lender to withdraw your monthly payments automatically.
If you are already struggling financially, this could mean you end up short for other obligations, from your mortgage to your energy bills. You can choose to cancel your recurring payments at any time, but this doesn’t make your debt go away, and you’ll still need to find a way to pay it back eventually
Fast Loans: Lenders Don’t Consider Your Ability to Repay
Fast loan lenders don’t dig into your credit history, which can make them appealing if you already have bad credit. However, one of the reasons that most credit providers ask to see your credit score is because it helps them guess whether you are likely to be able to pay them back.
Most lenders will also check your accounts and payslips to make sure that you can afford to borrow, but this is not the case with fast loans.
Considering that 53% of people who take out payday loans use the money to cover their day-to-day living expenses it’s clear that many borrowers are already struggling to get by and that taking out an expensive loan is unlikely to help solve that in the long run.
Fast Loans: It’s Easy to Get Trapped in a Cycle of Debt
When you combine all of the factors mentioned above, you have a recipe for loan default. If you find yourself unable to pay your debt, your lender will probably offer to ‘rollover’ the money you owe onto a new contract- complete with new fees and a new term-end looming in the not-too-distant future.
Your provider has a legal obligation to provide you with an advice sheet before they extend or rollover your loan. It should include a clear explanation of what the company is proposing as well as contact information for free debt advice agencies, who can advise you on alternative ways to manage your debt.
Fast Loans: Shrewd Business, or Just Plain Predatory?
Fast loans are often considered a form of predatory lending. This is because they tend to target people who are financially desperate and have no other borrowing options available to them.
That is not to say that there is no such thing as a scenario in which a fast loan could work as a legitimate solution. If you’re in the middle of a short-term cash-flow crisis and are confident you can repay the money on time, it can be an ideal solution.
But for many people, the shrewd business model employed by fast loan lenders risks leaving them in a difficult situation.
Fast Loans: Repossession of Your Vehicle
If you take out a fast loan which requires security, such as a logbook loan, you risk losing your vehicle if you don’t keep up with payments. Depending on your circumstances, this could have serious knock-on effects.
Fast Loans: Hidden Fees
Almost all loans, including fast loans, include extra fees and charges on top of the interest rate. These include fees for late-payments as well as also a substantial service fee, which is added to your loan repayments. If you roll over on your loan, you will have to pay another service fee, which increases the amount you owe.
Fast Loans: Identity Theft
Fast loans provide the consumer with cash as quickly as possible and with minimum fuss. This is fantastic news for people in the middle of a cash-flow crisis. It’s also fantastic news for fraudsters.
It is possible to be accepted for a loan online providing little more than some basic personal details. If somebody has access to your personal information, it is relatively easy for them to take out a loan in your name. When the fraudster doesn’t make repayments, your credit score will take the hit.
You can protect yourself by taking care to shred personal documents and ensuring that you are careful about the information you share online, and always use strong passwords.
Fast Loans: Loan Fraud Scams
83% of Brits who applied for a payday loan in 2018 made their application on the internet.
Unfortunately, scammers have found ways to identify people looking online for payday loans and make victims out of cash-hungry borrowers.
Loan scams are always evolving but often begin with a call out of the blue and an offer that seems too good to be true. It can be easy to overlook warning signs if you’re in a desperate situation.
If you are ever contacted out of the blue with the offer of a loan, you should stop, think and do thorough research before taking the conversation any further.
If you are unsure whether a provider is legitimate or not, check the FCA register, which lists all of the legitimate loan providers in the UK.
Why Would Anyone Take a Fast Loan?
With so many risks involved, its possible to wonder why anyone would take out a fast loan in the first place. In short, people with no savings and bad credit are in the market for payday loans, because they have few other options for borrowing.
In the right circumstances, fast loans can help to solve a short-term cash-flow problem. According to a survey by the FCA, nearly a third of people who took payday loans in 2018 said they would have gone without essentials- such as food and water- if they had not done so.
6.8 million people in the UK live below the poverty line in a household where at least one person is working, according to the FCA.
If you’re already living paycheck to paycheck, any unexpected expenses have the potential to land you in a cash-flow crisis. If you also have bad credit, many borrowing options might not be open to you so that fast loans could seem like your only solution.
Alternatives to Fast Loans
If you’re struggling financially, consider speaking with a credit counselling agency. They can help you come up with a plan to manage your budget and set up a payment plan you can afford for any debts you already have.
They can negotiate with creditors on your behalf and offer impartial advice on taking steps towards financial stability.
How Can Flexy Loans Help?
Here at Flexy Loans, we have partnered with some of the UK’s leading Lenders.
They have already helped thousands of people get loans already, and they can do the same for you.
Choosing a loan broker like us (we don’t charge any fees) means our application process matches you with the best loan available to you. All lenders we recommend are regulated by the FCA, which gives you an additional layer of protection.
To apply and see what loan is available to you, click on the below and answer the question.