Banks are institutions that indulge in the business of mobilising deposits and lending it forward to earn a spread over it. The process of borrowing money from a bank is time-consuming thus a person who wants to borrow money quickly for a short period will contact payday lenders. Before payday loans were common people used to borrow money from pawn shops or pawnbrokers by keeping their valuables as collateral. The payday loan, on the other hand, does not require the borrower to keep any security as collateral. This is one reason why payday loans have become popular in recent years. In the UK, this industry has grown exponentially in the past decade. Some give credit to 2008 financial debacle for the growth of payday loan industry. Here are some pros and cons of a payday loan that you should know before you apply for one.
Benefits of Taking out a Payday Loan
Simple Online Process – A borrower does not have to visit a bank’s branch and get involved in tedious paperwork for a loan rather a borrower can get a payday loan just by following some online instruction and filling online forms. The process usually takes around 20 minutes and a payday loan will be credited to your account to cover your expenses. A piece of cake, isn’t it?
No Worries about Credit Score – The payday lenders do not base their decision to lend their money based on your credit score. This credit score is mostly used by banks. In order to be successful in your payday loan application all you need is proof of employment. The credit score doesn’t matter at all.
Payday Loan Industry is a Professional and Regulated Industry – Not just anyone can initiate their business of payday loans online. In the UK, all payday loan service providers are regulated by the Financial Conduct Authority (FCA). Also, the FCA has set certain rules and parameters for every payday lender to observe and to follow in their dealings. These rules include the restriction on the maximum amount of penalty that can be levied on a defaulter and the maximum amount of interest rate that can be charged on the money lent. So when dealing with payday lender you have a peace of mind that if a dispute arises between you and the payday lender, there would be an ombudsman who will overlook the issue.
Small Amount Can Be Borrowed Quickly – If you are a person who blows money on Friday nights and are then forced to live on a tight budget during the end of the month before the next paycheque is deposited in your account, then there’s a good news for you. Payday lenders provide you with instantaneous cash if you want to borrow a small amount of money i.e. of you want to borrow £500 to £3000. You can use this money to cover your expenses and on your next payday the amount that you’ve borrowed has to be returned to the lender or else the penalty will be levied.
No Collateral Needed – Believe it or not, payday lenders do not require any collateral. This doesn’t mean that the payday lenders are morons. The fact that there is no collateral over the loan granted makes this loan risky. This is why a huge risk premium is charged to the customer to account for the risk that the payday lenders are exposed to. This is why the APR rate of payday loans can be as high as 1000%!
Drawbacks of a Payday Loan
There may be many benefits of payday loans but there are disadvantages and drawbacks of availing it as well. Time to balance things out!
High Cost of Borrowing – One most obvious drawback of borrowing money from payday lenders is that the interest charged on the borrowed amount is way too high compared to what a bank would charge. This humongous interest rate is what discourages most potential borrowers from borrowing money from such lenders.
Default Penalties are Also High – Payday loans should only be borrowed when the borrower is absolutely sure that he will be able to repay on time. This is because if the borrower is unable to honour his financial obligations at the date of maturity then the penalty of £15 will be imposed on him each day after the due date. On the contrary, if the amount is borrowed from any other financial institution, then the penalty on default will be far less as compared to the penalty imposed by payday lenders.
Credit Rating of the Borrower Will be Adversely Affected – It is imperative to mention here that although the payday lenders do not assess your creditworthiness on the basis of your credit score when extending you a loan, but if you default on your payment, this could deteriorate your credit score. This will increase your cost of borrowing money from a bank and may even increase your mortgage rate. So take a payday loan on your own risk!
Now before you borrow money from a payday loan provider you must consider the pros and cons of the loans and must compare the terms of various lenders in the industry so that you get a good deal. We at quiddicompare provide our users with the facility to compare all the well-known, reputed and trustworthy payday lenders and their APR rates. Visit our website today to find out the lender that best fits your requirements.