Here’s something we hear a lot; “Never a borrower nor a lender be” it’s a mantra used by lots of people, especially those who live a very frugal lifestyle and choose to live within their means. It’s an admirable way to live and we’re not suggesting those who follow this advice should change, but it does make us wonder how they get by when a crisis strikes.
Credit is utilised in many different ways. Some of us have an overdraft or a credit card that we only have in the case of an emergency and would only ever use it if the worst were to happen. Instead choosing to rely on our savings and salaries for day to day expenses. However, for some even having a credit card or an overdraft is something they wouldn’t even consider due to it counting as borrowing.
This is fair enough if they always have a reserve of cash they can turn to instead, but many people don’t. If a kitchen pipe bursts and starts flooding house with dirty water and they discover they don’t have enough money to repair it, then what options are open to them? They are unlikely to arrange a sit-down appointment with their bank while the water is spewing. In cases like this even those who disagree with borrowing money may find themselves in a situation where they have no choice.
The situation we’ve described above however is an extreme one. Most people understand that borrowing money from time to time is a necessary part of life. After all, how many of us buy our first home without a mortgage? The biggest loan many of us ever take out. Those of us who live frugally may not have enough money to fix a leaking pipe, and with no credit card or overdraft a small payday loan is the only lifeline open to them.
Then there are those who work a fifty-hour week, have two credit cards a maxed-out overdraft and no savings. They also have nowhere else to turn in an emergency and sometimes a small payday loan is exactly what they need to get them through. Even if it’s only for a few days when they get paid by their employer.
No matter our views on credit or borrowing money, there are periods of uncertainty in all our lives when it’s necessary to ask for help. Crisis can strike any time and sometimes it only requires a small amount of money to resolve. A leaky pipe, a broken boiler or a new car part may only require £200 - £500 to resolve but if you don’t have this money to hand this can cause immense problems. While £200 - £500 isn’t a huge amount of money in the grand scheme of things and is unlikely to take us long to pay back, it’s still a significant amount of money and not a sum we necessarily have lying around.
A small loan doesn’t have to be a payday loan, but for an amount less than £1000 they can be the most convenient ones to get. Personal loans from banks and building societies can also be easier to get these days, not requiring a lengthy sign up process. Many can be applied for and approved on our mobile phones, but for those with poor credit this can be difficult.
While a payday loan may generally higher in interest than a personal loan, they are much more likely to be approved if those applying have a poor credit history. They also can be applied for and approved within minutes, making them ideal in a crisis. Those who are attempting to fix a leaky pipe or broken boiler don’t have time to leisurely apply for a loan and make their case to a lender. They need cash quickly and waiting around can put them in further difficulty and debt in the long term.
Many banks and building societies also don’t offer very small loans for modest sums like £100 where payday loan companies specialise in it. It makes sense for a lender like a bank to lend a larger amount of money, this way they can charge a profitable amount of interest. This isn’t a criticism of the companies; they need to do this to exist in a competitive market, one where making a profit is essential. It also costs them each time they lend, so doing so for a small amount may not be worth it for them. While a customer may pay more interest in the short term with a payday loan, they’re paying for the speed and convenience. Essentially paying a fee for using such a helpful service. Even with this interest rate, this strategy will ultimately be cheaper for them over time then any form of long-term borrowing that they don’t need.
Another advantage of using a small loan, especially from a payday loan company is the positive hit it will have on the customer’s credit file. Our credit ratings are affected by two things:
Now there’s a loophole that those who have a bad credit rating can take advantage of; payday loan companies generally say yes, even if the customer has a low credit score. Just being approved for credit helps put a positive tick on our file. Then paying it back provides us with a second. As payday loans are generally small amounts of money this makes paying it back much less of a challenge for the customer. This means those who apply and pay back a payday loan have found an effective strategy for steadily getting their credit rating back where it needs to be.
It is important to remember that when applying for any loan to make sure the lender is approved and regulated by the Financial Conduct Authority. This applies to anyone who legally and ethically lends money in the UK from the largest bank to the smallest payday loans company. Each are bound by certain standards to make sure the customer is treated fairly and is never placed in a situation they can’t reasonably get out of in time.
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