Payday Loans

Will Getting A Payday Loan Affect My Credit Rating?

Taking out a payday loan is an option for many people wanting to access cash quickly. Some might worry that taking out this type of loan could affect their credit rating in the future, but like any debt, providing that it is paid back in full and on time, there is typically no reason why a person’s credit rating would be compromised. In fact, taking out a payday loan and repaying on time and fully could even, in some situations, end up having a positive effect on someone’s credit score.

It should be noted that even though taking out a payday loan and complying fully
with the terms shouldn’t impact a credit rating, it may not be wise to take
one out if a person is intending on applying for a mortgage or other significant
borrowing method in the near future. Some lenders have shown that they look less
favourably on people with payday loans in their credit history, regardless of
whether they have paid them back or not.

Taking out a payday loan could signal to some lenders that someone has money
management issues and therefore applications for large amounts of cash over a
long period could be refused.

Proceeding with caution is probably the best advice. Some people might be
tempted to take out a payday loan as a way of boosting their credit rating but
this could be a gamble in the long term, particularly as credit reference
agencies now differentiate payday loans separately on credit files. This means
that serial payday loan borrowers can easily be identified by underwriters who
may decide the risk of lending is just too great based on previous payday loan
borrowing history.

On balance someone taking out a payday loan once and paying it back in full at
the agreed terms could be unlikely to suffer any damage to their rating.
However, those borrowing this way regularly could signal alarm bells with
lenders when it comes to making a big commitment like buying a house.

For those concerned about their credit rating it is possible to keep an eye on
how it looks by requesting the information from credit rating agencies. They may
charge a fee for doing this but it could be the best way of someone keeping a
close eye on their credit file. It is also worth remembering that applications
for credit whether successful or not are recorded so be mindful of making
numerous applications if the likelihood is they’ll be refused as this too
could be damaging.

Payday Loans

The Birth & Evolution Of The UK Payday Loan Industry

Overview: Brief History

The Payday loan industry in the UK dates back to the early 90s. Initially, there were very few Payday loan lenders as the concept was fairly new and untested. Fast-forward two decades later to 2007-2008, which marked the onset of the global financial crisis, the industry was at its peak as it became extremely difficult for people to obtain credit facilities from mainstream financial institutions in the UK. Between the year 2006 and 2009, the number of people using Payday loans in the UK increased four times. 

Almost a decade after the recession, the Payday loan industry in the UK continues to enjoy tremendous growth. According to the FCA (Financial Conduct Authority), there are over 50,000 credit firms in the UK today offering Payday loan services. Approximately 200 of these firms are exclusively Payday lenders.

According to 2009 FCA statistics, 1.2 million people in the UK took out Payday loans amounting to 1.2 billion pounds. Approximately 4.1 million loans were taken out that year. Fast-forward three years later (2012), the size of the Payday loan industry had almost doubled in size to £2.2 billion.

Industry criticisms

This unprecedented growth came at a price. While the industry was at its peak, numerous complaints surfaced. Payday loan borrowers were increasingly complaining of various malpractices in the industry the most notable being the high interest rates, high late fees/charges and aggressive collection practices. These grievances caught the attention of the UK parliament in early 2010. 

The UK parliament pushed for investigations into the claims and suspect firms. Key legislation areas were identified the most notable revolving around the pricing of Payday loans, cloning of payday loan firms, flawed advertising practices and high late fees. The investigations revealed that the high charges among other malpractices were unwarranted given the fact that Payday loans don’t actually carry substantial risk as perceived by lenders in an effort to justify high fees and interest rate charges. In fact, Payday loans have been found to carry the same amount of lender risk as other forms of credit.

In 2014, several firms were reprimanded and directed to pay fines for illegal practices. Among them was which was reprimanded for unlawfully demanding payment on behalf of solicitors. Cash Genie was also reprimanded for imposing unlawful charges. 

Changes in UK law governing Payday loans

It wasn’t until April 2014 that the Payday loan industry in the UK got a major overhaul in all aspects from the way the loans are issued to the way they are repaid. The FCA set two main goals. One; to ensure all Payday loan lenders lend to borrowers who can afford the loans. Two; to ensure Payday loan borrowers were fully aware of the risks as well as cost implications of borrowing Payday loans or short term loans. Under this goal, the FCA also set out to ensure borrowers were aware of the correct cause of action in case they encountered financial difficulties meeting their repayment obligations. 

To achieve these goals;

· The FCA set an interest cap of 0.8% per day: You can’t pay more than 0.8% interest per day on your UK Payday loan. 

· The FCA has also fixed default fees at £15.

· The total cost cap has also been fixed at 100%: The entire cost of the loan can’t exceed the cost of the loan.

· The FCA has also put other stringent measures to drive up standards in the Payday loan industry in the UK. For instance, Payday loan firms will be subject to affordability tests going forward. Limits have also been set on rollovers and continuous payment authorities.

For the thousands of people who have struggled to repay Payday loans, these new laws have been a giant leap forward. They have restored sanity to an industry that had turned rogue.

Payday loan: Benefits to borrowers

Since UK Payday loan borrowers now enjoy a considerable amount of protection now more than ever before, there is absolutely no reason why they shouldn’t take advantage of the loans which come with great benefits such as;

1. Quick processing: You can get Payday loans or same day loans quickly (in less than an hour after application).

2. Great source of emergency cash: Payday loans are great sources of money for catering for emergencies such as car repairs and emergency medical bills when your payday is weeks away.

3. Few restrictions compared to other forms of financing: You just need a job to secure a Payday loan. 

4. No collateral: You don’t need an asset/collateral to secure a Payday loan

5. No credit checks: Payday loans lenders don’t do credit checks like other lenders before giving out loans. As a result, you can qualify for a Payday loan even if you have a poor credit score/rating. 

6. Fast and convenient application: Most, if not all, Payday loans lenders in the UK accept and process online loan applications 24/7. As a result, you can apply and get a Payday loan within minutes at the comfort of your home. Furthermore, the application process is easy. 

7. Favourable legislation: The UK Payday loan industry has favourable legislation that protects borrowers. With daily a 0.8% daily interest cap in place as well as a fixed total cost and default fees, borrowers are rest assured of protection. 

Payday Loans

Who uses Payday Loans in the UK?

Payday loans have become increasingly popular in recent years as a way of
individuals raising funds. A loan of this type is typically needed for something
short term hence the name payday loan but with bank loans and other kinds of
credit harder to come by since the last recession it can be a route that more
and more people look to in order to buy what they desire.

Reasons for needing a payday loan

Raise capital quickly – for someone needing cash quickly a payday loan could
be a good solution. For instance, someone needing to pay for car repairs or put
a deposit down on a holiday might want to raise extra cash fast rather than wait
and miss out.

Emergency – a payday loan is generally used to carry someone over until they
get paid. People could look to take one out in an emergency such as falling
behind with bills or having to purchase a new fridge or other appliance

What kind of people take out payday loans?

Anyone could be eligible to take out a payday loan however research shows that
many young people use this type of finance rather than running up an
unauthorised overdraft with their bank. It is believed that payday loan
candidates are typically young males.

Why not use other forms of credit?

It could be said that other forms of credit such as bank loans or car finance
could have more favourable terms than a payday loan. However, people quite often
do not want the hassle of applying for a bank loan. Alternatively they may know
that they would not qualify for that type of loan in advance. Some other reasons
for not applying for more traditional credit could be:
– To avoid borrowing from friends or family – some people may not like to
admit their money worries to loved ones and a payday loan could be just the
thing to put them on.

Bad credit – in some cases people don’t qualify for more typical forms of
credit. It could be possible to meet the requirements of a payday loan even
with previous bad credit.

– Speed – people looking for a short term loan of just a few weeks don’t
usually have the time to go through potentially lengthy approval processes. As
such a payday loan could be a quicker option to pursue.

A payday loan could be just the right type of loan depending on the
circumstances for any individual.