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7 Common Misconceptions about Payday Loans in the UK

- by Isla Williams

Payday loans have gained something of a bad reputation in the UK. This is partly due to negative coverage in the media. However, to a large extent it is thanks to unscrupulous lenders who existed before the market was more tightly regulated, and have made the misconceptions about payday loans so widespread.

misconceptions about payday loans - cashfloat

Misconceptions about Payday Loans – Believe it or Not?

Things have changed in the last few years, and payday lenders are much more respectable than they were before 2014. Unfortunately, many people still don’t trust the payday loan industry and how it operates. Changing people’s opinions can take a long time. But, it’s important for people to have an accurate picture of the financial options they have available to them. Make sure to debunk any misconceptions about payday loans that you might have before dismissing them as a legitimate option for you.

Payday Lenders Prey on Vulnerable People

One of the reasons that many people are wary of payday loans is that they believe that lenders target vulnerable people. In the past, this wasn’t entirely untrue. Before the Financial Conduct Authority regulated payday loans, there were some lenders who were happy to appeal to people in desperate need. They would approve loans for people who most likely wouldn’t be able to pay them back. Then, they would pile on the late fees and charges. This led to many people thinking that a payday loan would help them when it just got them into more financial trouble.

The FCA proposes to ensure consumers are treated better when applying for, and repaying, payday loans. Click To Tweet

However, changes to regulations in the last few years have made it much harder for lenders like these to operate. Payday lenders must now be much more responsible about who they approve for a loan. They also must provide information about managing debt, and many even offer advice on alternatives to payday loans. Companies need to have approval from the FCA before they are allowed to offer payday loans. New regulations have meant that some lenders have cleaned up their act. Most unscrupulous lenders were forced to leave the market.

Payday Lenders Are Always Hiding Something

Another misconception about payday loans, is that they come with piles of hidden fees and charges. Before the FCA started regulating the industry properly, some lenders were guilty of adding hidden fees to their loans. People who took out loans from them could end up in even more debt than they started with due to unexpected charges. Even when they were clear about their interest rates, it was still sometimes difficult to work out the full cost of a loan.

misconceptions about payday loans - cashfloat

Thanks to the new regulations, it’s much less likely that anyone lender will pile on fees they weren’t expecting. The laws require payday lenders to be transparent about what their loans will cost. This is including interest and any late fees a borrower have to pay. Lenders also must make sure borrowers understand the rules and regulations that govern the industry. Borrowers also need to understand what their rights are when they take out a payday loan.

Payday Loans Cause Spiralling Debt

Many people are wary of payday loans because they believe that they can trap them in a spiral of debt. If you were unable to repay a loan, it could make your finances seem worse rather than help you to improve them. However, the industry’s regulations mean that if you’re likely to be unable to repay a loan, lenders probably wont approve your loan application. A few years ago, the story might have been different. It was much easier to gain access to a payday loan, even if you wouldn’t have been able to pay it back. After the new regulations started, approvals for loans saw a significant drop. The process of applying for a payday loan is often still straightforward and many people can access one. But, lenders don’t approve applications as easily as they did in the past.

misconceptions about payday loans - cashfloat

Payday lenders must help people and offer advice on dealing with debt. When they send out communications to their borrowers, they must direct them to government resources on dealing with debt. They are also required to tell borrowers where they can get debt advice before rolling over someone’s loan. If someone is having trouble paying back their loan, the lender must with them to create a repayment plan they can manage. Also, there are rules about when and how they can take a payment for a loan.

Only Really Poor People Use Payday Loans

Some people believe that only people who are on or below the poverty line use payday loans. They think that only those who regularly struggle to pay for everyday expenses might turn to payday loans to help them pay for things. However, if you look at statistics on who uses payday loans, they present a much more diverse picture. Many of the people who use payday loans have stable jobs and reasonable salaries, but they often find that a payday loan is the most convenient option to access money quickly. Even people who have strong finances can find themselves with unexpected expenses to pay. Individuals who use payday loans can be of all ages and come from all walks of life.

Payday Loans Always Have High-Interest Rates

The image of payday loans with extraordinarily high-interest rates has stuck around from the days when the industry wasn’t well regulated. At the time, some payday lenders did have interest rates in the thousands, if you looked at the APR rate, which is over a year. People could end up paying back a lot more than they borrowed if they weren’t careful. However, things have changed since then, and despite the misconceptions about payday loans, they actually have much more manageable interest rates and fees.

misconceptions about payday loans - cashfloat

This is due in part to the new regulations, which set limits on how much payday loans can cost. For example, the interest and other fees charged on loans must now not be over 100% of the loan amount. So if you borrow £100, you won’t pay back more than £200. Also, the cap put in place in 2015 says that lenders can’t charge more than 0.8% in interest each day. For example, if someone borrows £100 over 30 days, they will pay back £24 in interest. A cap on late fees means they cannot be more than £15 for a one-off default fee. However, it is important to remember that you could end up paying interest in the late fee too.

Payday Loans Are Only for People with Bad Credit

Payday loans can be a good option for some individuals who have a poor credit rating. One of the common misconceptions about payday loans is that payday lenders will only approve loans for people who have bad debt. However, payday loans are not just for people who have a bad credit history. They can be useful for all kinds of people, and lenders approve loans for many different types of people. In fact, if you do have poor credit history, you could be more likely to have your payday loan application rejected. Payday lenders need to ensure you can repay your loan. In fact, they want you to be able to repay it so that they can make money. Lenders will only approve loans that they believe the borrower can repay. Even if you have a great credit history, you might find that you need some extra cash on occasion. A payday loan could come to your rescue and help you bridge a gap in your finances.

misconceptions about payday loans - cashfloat

Payday Loans Are Just for Emergencies

People often view payday loans as a financial option to access when you find yourself in a sticky financial situation. However, deciding when it’s the right time to take out a payday loan can be a little trickier than that. There are some financial struggles that you shouldn’t use payday loans to solve. For example, a regular, ongoing expense. This is because a payday loan should not be used as a long term solution as it could get you into further debt. If you find that you are using payday loans for things like groceries or household bills, you need to find another solution.

Some people use payday loans to pay for less necessary, one-off expenses, and this can sometimes be justified. Payday loans can be used for many things, from emergencies to less pressing expenses, but financial advice should always be taken if you are unsure. In addition, you should never take out a payday loan unless your are sure you can repay it on time.

It’s important to examine the misconceptions about payday loans that you hear, and make sure you get the truth before you make a decision about them. Things have changed a lot in the last few years so you might need to update your beliefs.

Misconceptions about payday loans- cashfloat
Isla Williams
Caribbean born Isla Williams is excited to join the Western Circle Educational channel team. A born writer, Isla had her first article published at age 9 in a local magazine. Isla’s joy emerges when pen strikes paper, and she can tap into her creative self. “I love to share knowledge/information and help others to be in the know while being as friendly as I can.” Isla is an accountant by profession but has taken a break to do what she enjoys most. Mother nature is her best friend, especially when the Sun is shining. A keen surfer in her youth, Isla looks forward to those rare trips home where she joins her family and hits the waves.
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