When faced with unexpected expenses or a financial emergency, payday loans may seem like a quick and easy solution, especially if your credit score is not the best. However, before taking out a payday loan, it is important to understand the risks associated with this type of lending. Very bad credit loans direct lenders UK offer a quick fix when faced with a financial emergency, but before you decide whether this is the best option, read on as we take a look at some of the risks that come along with this type of short-term loan, and what it could mean for you and your finances.
One of the biggest risks of taking out a payday loan is the high-interest rate. Payday loans typically have an annual percentage rate (APR) that is much higher than traditional loans, such as personal loans or credit cards. This means that the cost of borrowing the money will be much higher, and it can be difficult to pay back the loan on time. Interest rates are high due to the fact these loans are available to those that have bad credit. Whilst this is beneficial for those struggling to make ends meet, it means higher interest rates as lenders must be sure that they’re going to make the money back.
Another risk of payday loans is the potential for rollover fees. If you are unable to pay back the loan on the due date, the lender may offer to “roll over” the loan, which means extending the loan for another period of time. However, this will come with additional fees, which can quickly add up and make the loan even more expensive. Additionally, failing to repay could lead to your loan becoming delinquent. Following this, you may end up with a debt collection agency chasing you for money, and in the worst case, they may take you to court.
Taking out a payday loan can also lead to a debt cycle, where you are constantly taking out new loans to pay off old ones. This can make it difficult to break free from the cycle of debt and can lead to financial problems in the long term. Whilst payday loans can be a good way of managing an emergency, applying for one when you know you’re going to struggle to pay can be hugely detrimental to your finances. In this case, you should look for alternatives.
Limit future access to credit
Taking out a payday loan can also limit your access to credit in the future. Payday loans can have a negative impact on your credit score, which can make it more difficult to get approved for other types of loans or credit further down the line. To avoid this, you should make sure that you can pay off the loan on time and in full. If you struggle to pay off the loan and default, this could end up showing on your credit report for up to seven years, and lenders will not trust you to pay back the money, making it harder for you to access finance.