Payday Loans – Worth the Effort or Too High in Risk?

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Payday loans have grown hugely in popular and within the last year, nearly 20 million people took one. But are they too risky for borrowers who already have credit problems?

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No matter how deep the financial crisis that you are in, you can still access credit. While the larger economy tumbled into a deep recession in 2009, regular people found that banks and lenders began to clear out the bad debts folders. Getting a normal unsecured loan got much harder – so where was the alternative? Payday loans, logbook loans, loans for people with bad credit and prepaid cards all became more popular than ever as a new way to pay and access money.

Offering a fast cash personal loan in return for limited personal information and no credit checks, payday loans lenders allow all types of borrowers to access between £80 and £1,000. In other words, people who usually get turned down for credit because of a poor credit rating, no credit history, county court judgements, defaults and arrears can all apply successfully. The money is transferred quickly to the borrower’s nominated bank account, making this an ideal solution for an emergency situation. But what happens next?

Most payday loans have a short term and are designed to cover a borrower’s cash flow until their next payday – hence the name. In other words, repayment takes place within around one month. That doesn’t leave much room for manoeuvre, say critics, and when you consider the interest rate on a regular payday loan the loan can become expensive very quickly. Some people have even accused payday loans of pulling people into a ‘debt cycle’ – they apply for a payday loan out of desperation and end up in further debt because they cannot afford the repayments plus interest.

But others argue that the offers provided by companies like Lending Stream, with no credit checks and a flexible term – take up to six months to repay or pay back early without penalties – are a vital lifeline for people who cannot access loans from normal banks. For them, am emergency situation can arise and rather than fall back on a credit card or regular loan, a payday lender provides quick relief.

There are ways to minimize the risk of getting caught into debts from a payday loan. For one, customers are generally encouraged to spend some time browsing through the payday loan market. There are now so many providers and the majority of them offer a no-frills online service. A financial comparison site can be useful to whittle down to the essential features of each one – for instance, a site like shows how much is repayable per £100 on at least 15 different payday loans lenders. This is a much easier way to check how much you will need to repay on the money you have borrowed. Most comparison sites allow the customer to make up his or her own mind and encourage them to seek independent financial advice before taking any loan product.

Loans for people with bad credit are generally more flexible than payday loans, but the terms can be moderated according to a borrower’s credit status. So, where a credit rating is poor the lender will charge higher APR (annual percentage rate). Prepaid cards are not a loan product – they are simply a ‘pay as you go’ payment card issued with Visa, MasterCard or Maestro allowing the user to load up the card with funds and can then use this wherever the card is accepted. There is no credit facility or overdraft on a prepaid card.


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Xenia Rainey
Which Way to Pay
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