Payday loans are a type of unsecured, short-term loan that should only be used in certain situations. This type of loan was originally developed to help those who were financially struggling and waiting for their next payday – helping to keep them on top of certain payments before receiving their next paycheque.
Payday loans can be a great way to finance various situations, however, there are some circumstances where they should not be used. Below is a table detailing some of the main situations where this type of loan should and should not be used:
|When you should use payday loans||When you shouldn’t use payday loans|
|Emergencies||To pay off another loan|
|Short-term expenses||For shopping and other luxury goods|
|When you know you can pay the loan back||When you don’t have a stable income|
Payday loans should only ever be used in the right circumstances, being a quick and easy solution to a short-term financial problem. It’s important not to become reliant on payday loans, and to avoid having them for long periods where possible.
When You Should
There are a variety of different circumstances where a payday loan would be useful, including paying for unexpected emergencies. For example, if your boiler breaks or your car has to be taken into the garage, you will probably need these fixed urgently, but may not have the cash to do so until you get paid.
A payday loan can help provide the funds you need on a short-term period, with repayments never usually lasting over 12 months.
You should also only use this type of loan for short-term expenses, like a boiler breaking or taking the car to the garage. Some people also use payday loans to pay for bills, however this should only be for a short-term period, and borrowers should not rely on the loan to keep up with their regular, monthly expenses.
Payday loans should also only ever be taken out when the borrower is confident they can make repayments. If you struggle to keep up with repayments or default on the loan, this could complicate your financial situation further, adding extra fees whilst also damaging your credit score in the process.
When You Shouldn’t
You should never use a payday loan to pay off another loan. Payday loans usually come with an APR in the triple digits, hence they are part of the high-cost short-term credit (HCSTC) category. Using a payday loan to pay off another loan can cause a spiral of debt that is difficult to climb out of.
You should also never use a payday loan to go on shopping sprees, fund holidays or pay for other luxury goods. This can encourage bad habits, and also cause further debt problems.
Additionally, you should not take out a payday loan unless you have a stable income, or know exactly how you’ll be paying off the loan. It’s vital to budget accordingly, to ensure loan repayments are made.
Keeping up with the repayments on a loan will keep your financial situation from worsening, as well as keeping your credit score unharmed. In fact, keeping up with the repayments on a loan can actually improve your credit score, as it builds up a good history of borrowing.
You may want to help a friend or family member that has been unable to get a payday loan, however, you should never take a loan out for someone else. The legal responsibility of this loan will fall on you, meaning that if repayments are not kept up, you will be liable for any late fees and impact to your credit.
What Are the Alternatives to Borrowing a Payday Loan?
Whilst payday loans can help borrowers stay financially afloat during difficult periods, it is important to know that there are always alternatives available.
Borrowing from family and friends will always be a safe form of borrowing and will never run the risk of late fees, heavy debt or repossession – and it can often be fast and interest free.
For very low cost loans, you can always look at your local credit union which offers rates from 26% APR and no default or late fees. Using a credit union can take up to 7 days for funds to clear, but assuming you are a member of the local church or work in the public sector of that community, they can be one of the cheapest forms of borrowing available.