Advantages & Disadvantages of Payday Loans

A payday loan is a sum of money borrowed from a direct lender. As the name suggests, a payday loan is designed to tide you over between one payday and the next, and is typically repaid in full, with interest, within a month.

What are the advantages and disadvantages of payday loans? Could a payday loan be suitable for me?

Like any credit product, there are multiple advantages and disadvantages to payday loans, which we’ll take a closer look at in our guide. We hope these insights could help you decide whether a payday loan is the right choice for your current financial situation.

Reasons you may consider a payday loan

If you’re thinking about searching for credit, you might have asked, ‘what are the advantages of payday loans?’.

Below, we’ve listed some common reasons why borrowers might consider a payday loan.

1. A financial stopgap. A payday loan is often used as a financial float in the event of an unexpected expense, such as a car in need of urgent repairs following a failed MOT, an unbudgeted vet bill, or a replacement boiler.

2. Potentially ‘quick’ access to funds. A loan application shouldn’t be rushed, and it’s not possible to ‘speed up’ the process. However, many payday loan providers understand that borrowers are likely to be in a position where they need money as soon as possible to cover the cost of a financial emergency, and therefore offer a straightforward application procedure and potentially quick payout. If approved for a payday loan, the lender could send your money on the same day, although the time it takes for the funds to clear in your account will depend on your bank’s policies and procedures.

3. A possible option for borrowers with bad credit. Worried your bad credit score could prevent you from being approved for a loan? You could get a payday loan even with bad credit, although you’ll need to consider the fact that you could be offered a higher rate of interest, which will increase the cost of borrowing.

4. Fair and transparent lending. In 2014, the FCA introduced new rules on payday lending to increase fairer, more transparent and affordable lending within the industry. As of 2014, borrowers must never have to pay back more in fees and interest than the amount borrowed, and defaulted repayment fees are capped at £15.

Before you make an application with a direct lender, you should make sure they appear on the FCA register. If they don’t, the company or individual is likely to be operating outside of FCA guidelines, and you will not be offered the same level of protection.

5. No collateral required. Payday loans are usually unsecured, which means you aren’t required to attach the borrowing to an asset, such as your car or home.

Things to think about before searching for a payday loan

A payday loan isn’t a suitable option for every borrower. As with any credit product, there are certain disadvantages to payday loans and several things you should think about before you apply.

1. Availability. Payday loans are not as common as they used to be, meaning there may be fewer options to consider.

2. Cost. The interest rate on a payday loan could be high.

3. Commitment. A loan, regardless of the type, is a serious financial commitment. If you need money in a hurry, it’s really important not to rush into making a decision that might not be right for you. Remember, when repaying a loan, you don’t just pay back the money you’ve borrowed; you’ll also be charged interest. You should take the time to consider how this will affect your monthly budget. You shouldn’t apply for a loan if making your repayments will leave you unable to cover the cost of your essential outgoings, such as housing and bills.

4. Short repayment term. While a short repayment term could be ideal for some borrowers, it could be unsuitable for others. As discussed, a payday loan will need to be repaid in full within a month.

5. Credit score impact. A payday loan, like any type of credit product, will affect your credit score. A late or missed repayment will cause your credit score to decline. On the other hand, making your repayments on time could increase your credit score, provided that any other credit commitments have also been kept up to date.

Alternatives to payday loans

Little Loans is a credit broker. The 30+ lenders on our panel do not offer payday loans; instead, they offer unsecured, short-term personal loans between £100 and £10,000.

Unlike a payday loan, a short-term loan does not need to be repaid within a month. With Little Loans, you could repay your loan across a term of between 3 and 60 months, depending on the amount you apply to borrow.

All the lenders on our panel are authorised and regulated by the Financial Conduct Authority (FCA).

Could I get a short-term loan if I have bad credit?

Having a history of bad credit doesn’t necessarily mean that your short-term loan application will be turned down, although you might find that you have fewer borrowing options than someone with good credit.

Little Loans works with several direct lenders of loans for bad credit. While you could get a short-term loan with bad credit, you should be aware that you could be offered a higher rate of interest.

How can I apply for a short-term loan as a payday loan alternative?

You can use Little Loans’ credit broking services to search for a payday loan alternative if you:

• Are over the age of 18;
• Are a UK resident;
• Have a UK bank account and a valid debit card; and
• Have a regular source of income paid into your bank account.

Alternatives to payday loans: Why choose Little Loans?

There are many reasons to choose Little Loans to help you search for a short-term loan as a payday loan alternative. Here are just five:

1. Our credit broking service is free to use.
2. Once you’ve filled out our straightforward five-minute online form, your no-obligation quote will be ready in just 60 seconds.
3. A number of the direct lenders on our panel could send your money on the same day your application is approved.
4. Little Loans only works with FCA authorised and regulated lenders.
5. From bad to excellent, any credit score is considered.

Is a short-term loan better than a payday loan?

Only you can decide whether a short-term or payday loan is better suited to your situation.

A payday loan could be an option to consider if you’re confident that you can afford to repay the full amount of money you’ve borrowed, plus interest, within a month.

If you’re hoping to spread the cost of borrowing beyond one month, a short-term loan could be something to think about instead. Depending on the amount of money you borrow, short-term loans usually come with a range of available repayment terms from a couple of months to several years.

What to do if you can’t afford to repay your loan

If you’re struggling with your loan repayments, you should contact your lender.

Don’t suffer in silence and allow missed repayments to build up – this will harm your credit score. The sooner you let your lender know that you’re experiencing difficulties, the sooner they can work with you to find a suitable solution.

Free, confidential financial advice can be accessed through StepChange, MoneyHelper, Citizens Advice, and National Debtline.