If you need cash fast, there are few loans easier to access than payday loans. With online applications and decisions in minutes, you can often have the money in your bank account almost instantly. However, these loans have a nasty side too. Some of the highest interest rates in the industry and phenomenal late fees are two unfortunate side effects of fast loans.
So are payday loans ever a good idea, especially for those on lower or less stable income? This article explores the pros and cons of payday loans for people on benefits.
How Do Payday Loans Work?
Short-term loans, also known as payday loans, are easy-access loans that were originally designed to tide people over until payday. They’re meant to pay for sudden unforeseen expenses such as car or boiler repairs that you can’t make out of your salary or savings.
You can’t borrow a huge amount – typically a few hundred or thousand pounds at most – and it has to be repaid quickly. The money is deposited directly into your bank account.
As the name suggests, you usually have until payday to pay the money back with interest. You tend to need to agree that the company can then take its payment directly from your debit card the day your next salary or benefits payment is due. However, more lenders now let you choose the repayment period and even pay back the loan over a period of three months or longer. Repayments are still taken automatically in agreed instalments.
Can I Get a Payday Loan if I’m on Benefits?
Yes, you can get a payday loan if the bulk of your income is from benefits. While some more traditional lenders won’t accept income sources such as Universal Credit and student loans, payday loan lenders tend to be less strict.
Do I Need Good Credit To Get a Payday Loan?
In short, no. When it comes to most payday loans, there is every chance your application will be approved as long as you can prove you have regular income coming in and you can afford your repayments within your current budget. The lender is obliged to perform a credit check against your application, but even a poor credit history may not put them off.
How Expensive Are Payday Loans?
There’s no getting away from it; payday loans are an incredibly expensive way to borrow money. For the convenience of near-instant cash and the willingness to turn a blind eye towards poor credit histories, payday lenders charge incredibly high-interest rates and fees.
Interest Rates on Payday Loans
For comparison purposes, let’s compare the average annual percentage interest rate of charge (APR) for a payday loan and a typical credit card.
|Type of Loan||APR (%)|
|Typical Credit Card||Up to 1500%|
Caps on Repayments
- Never pay back more than twice what you borrowed.
- Never have to pay back more than £24 in fees and charges for every £100 borrowed if you take out a loan for 30 days and pay it back in time.
- Never have to pay back more than £15 in default fees (plus interest on the amount borrowed) if you don’t make your repayment in time.
This is one way regulators have tried to limit spiralling debts associated with payday loans. However, debts still quickly build – especially if you have to borrow more to pay them back.
Are Payday Loans Dangerous?
Martin Lewis from MoneySavingExpert calls payday loans “a financial nightmare” which you “should avoid entirely if possible”. Many other industry experts agree.
Even if you don’t think they’re dangerous, payday loans are undoubtedly a very expensive way to borrow. Debts can quickly stack up, so they’re notorious for making financial situations much worse if you can’t afford to pay them back on time. This is why you need to be clear about your budget and how you will make repayments before you take out the loan.
What Happens if I Struggle To Make the Repayments?
If there’s any chance that you won’t be able to make your repayments, it’s essential that you talk to your lender and try to come to an agreement to avoid falling into the payday loan trap.
If you can’t repay your payday loan, the lender may offer you an extension known as a ‘rollover’ or a ‘deferral’. This might sound like a good idea at the time, but in reality, it can quickly lead to the amount you owe increasing in both interest and late fees. If you take out another loan to cover the first one, you sign up for additional interest and fees all over again.
Payday lenders can legally only rollover a payment a limited number of times but keep pushing back payments, and the debt, and the repayments due will grow higher and higher. This could leave you struggling to pay for essentials with the remaining money in your bank account. This can leave you in a worse financial situation than you were in when you started.
But don’t panic. If you’re struggling to get out of a cycle of debt, there are several debt advice services that can support you. The Money Advice Service and StepChange, amongst other charities, provide free and impartial advice to help you understand your options.
Payday Loan Alternatives for People on Benefits
Payday loans are considered by many to be a last resort for the worst-case scenarios after every other option has been exhausted. At the very least, there are much cheaper ways to borrow out there than short-term loans – even if you’re on benefits.
Borrowing From a Traditional Lender
- Credit cards. Credit cards that offer 0% interest are a cheaper way to borrow. If you have poor credit and these aren’t an option, even credit-builder or ‘bad credit’ cards are less expensive than payday loans. However, be careful not to overstay your welcome on these cards. Always make at least the minimum monthly payment and watch out for the date at which the interest increases above 0%.
- High-interest personal loans. With these, lenders restrict the amount of money you can borrow and charge higher than average interest rates. They do this because lending is a risky business for them, and this offers some protection. While interest rates might not be the most attractive, they will be cheaper than payday loans.
- Guarantor loans. Having a guarantor who has regular income or valuable assets and a good credit score themselves co-signing makes a loan application more attractive for lenders. A guarantor is a safety net – they’re someone who agrees to make repayments on your behalf if you default on them.
- Secured loans. Lenders see a loan as less risky if there is some form of collateral; usually, a car or a house put forward as security. This might allow you to access better loan deals while on benefits, but it also means that the lender can repossess and sell your car or home to get their money back if you can’t meet the repayments.
Alternative Forms of Borrowing
- Budgeting loan. This isn’t an immediate solution, nor a guaranteed one, but you may be eligible for a budgeting loan or advance of up to £821 from the government if you’ve been on benefits for six months or longer. It can be used for a range of uses, and repayments are interest-free and taken directly out of your benefits payment.
- Peer-to-peer lending. Peer-to-peer lending pairs up someone looking to borrow money with someone willing to lend it. As peer lending platforms aren’t connected to traditional banks, there may be some scope for those who would find it tricky to be approved for a loan elsewhere to borrow in this way.
- Credit union. A credit union is a community-run saving organisation that connects people with a common bond – typically where they live or their occupation. They aim to support people who may not have access to financial products elsewhere, either from low income or poor credit history. Credit union loan rates are capped at 42.6% APR, and most loans they offer are considerably cheaper than this.
- Friends or family. It can be awkward asking for help, especially when it’s about money, but this could be a way to prevent you from entering into a potentially dangerous loan situation. If someone will help you out, do it properly and write down the amount you owe them, any interest they want, and when you’ll pay them back.
Tips for Taking Out a Payday Loan When on Benefits
If you’ve considered all your options, calculated what you can safely afford and still think a payday loan is the right option for you, bear these tips in mind.
- Be clear on what you can afford. If you haven’t already, work out an accurate budget where you track all the money you have coming in and going out on a regular basis. Be accurate and honest with yourself here: if you’re stretching your budget to be able to fit in payday loan repayments, it could quickly become a sticky situation if any more unexpected expenses come along. Always err on the side of caution.
- Borrow as little as possible. As with any loan, only borrow what you need. This is especially important with extremely expensive loans like payday loans as you could end up owing back far more than you borrowed initially.
- Budget so you can pay it back as quickly as possible. It can be tempting to take the offer of a longer repayment schedule and the lower monthly payments that come with that, but remember that this will mean you pay back more overall.
- Don’t take out one payday loan to pay off another. It’s a very slippery slope if you’re borrowing money to fill in the gap between your income and expenses. If that’s happening to you, there’s a bigger problem at play that a payday loan simply won’t solve. This is how debt spirals begin and they can be very hard to get out of. If this is the case for you, speak to a debt advice charity and inform your lender.
- Always check the lender is regulated by the FCA. Although payday loans are arguably a dangerous product, the companies that provide them are authorised by the FCA. You can check to see if a company is authorised using the FCA Register. This, amongst other things, means they should not try to put you under undue pressure, threaten you, or discuss your debt with others without your permission.
And finally, don’t consider a payday loan if you know you won’t be able to pay it back. This is perhaps the fastest way to get yourself into a downward spiral of debt.
Where Can I Find the Best Payday Loan Deal?
Looking online at a comparison website or speaking to a loan broker are two of the most common ways to compare deals. While all payday loans are expensive, they will be some variance in the market, so, like always, it pays to shop around and do your research.
What’re the Criteria for Being Approved for a Payday Loan?
There’s a common misconception that payday loan companies will approve anyone and everyone. However, following a clampdown of the industry by the FCA, this isn’t necessarily the case anymore, and lenders are generally less reckless than those of decades gone by.
The general approval criteria for a payday loan is:
- Applicants must be above 18 years of age
- Must have confirmation that they are a UK resident with a fixed UK address
- Must have evidence of regular monthly income
- Must have a UK bank account and willingly provide debit card details
Some payday lenders don’t share your data with credit reference agencies, meaning they can advertise payday loans with no credit checks. However, if you think about it, is this really a responsible way of lending? Responsible lenders perform checks and have the right to reject applicants they feel are already in too much debt to be able to meet repayments.
How Can Flexy Loans Help?
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