5 Myths About Payday Loans Debunked

Payday loans have, over the years, acquired a bad reputation in the world of borrowing money and short-term lending. However, some information about payday loans is unsubstantiated. If used responsibly, payday loans can be a good option for those seeking short-term funding between paydays.

Here, we share the top five myths about payday loans and the truth behind them.

Myth #1: Payday Loans are Only For People With Bad Credit

Payday loans are often highlighted as a solution for those with poor or bad credit scores and are claimed to be one of the only options available for this type of borrower.

However, this is not necessarily true. Many borrowers, including those with a strong credit history and people with good or very good credit scores, may also benefit from payday loans.

Those with good credit, just like any other type of borrower, can find themselves with unexpected expenses between paydays and, rather than wait for the approval of a traditional loan or line of credit, may choose to take out a payday loan for a faster way to cover their costs.

Payday loans are potentially available for people with good credit, as well as people with bad credit.

Myth #2: Payday Loans Always Have Sky-High APR and Interest Rates

Payday loans are notorious for their very high APR, and lenders are portrayed as sharks looking to make a huge profit. Although offers for 0% APR may not be likely, some lenders may not charge exponentially high-interest rates.

Nevertheless, lenders will always charge interest in order to fund the service they provide for their customers, whether in the form of a payday loan online or another loan. This is also the case with credit cards and overdrafts, whereby the provider of the loan or credit facility has to charge interest on the loan in question.

On the whole, payday loans are generally more high-risk than bank loans for the lenders because there is the likelihood of non-payment. As such, this possibility is reflected in the interest rates charged to borrowers .

However, payday lending is a different type of lending compared to bank loans and traditional lines of credit. Payday loans fall into the category of high-cost, short-term loans (HCSTLs). Therefore, due to the short-term nature of payday loans, they may come with higher interest rates.

Myth #3: Payday Loans Work On Shorter Time Frames

Some alternative lenders may not charge an arrangement fee, and some may not charge additional fees for early repayment. This means that if used responsibly, payday loans may not cost an exorbitant amount of money. You may only pay a high-interest rate if you make a late payment or miss a scheduled repayment.

Myth #4: Anyone Can Get Payday Loans

Although payday loans can be quicker and more straightforward to be approved for than other types of loans, that does not mean that everyone who applies is accepted. Although many lenders may provide fast decisions in the UK, it is by no means guaranteed that you will be accepted for a payday loan.

There are certain eligibility criteria that must be met in order for a payday loan to be issued, including:

• Applicants must be over 18 years old

• You must be employed or have a verifiable minimum income

• No outstanding loans

• No payments to gambling sites

• Valid and active current account

Remember that these eligibility criteria may vary by lender. Also, keep in mind that direct lenders in the UK should be authorised and regulated by the Financial Conduct Authority (FCA). Depending on the lender, there may be more flexibility when it comes to specific eligibility requirements or credit scores. However, applicants will always have to meet the above criteria in order to be approved for a payday loan.

Myth #5: Payday Lenders Always Charge Additional Fees

Payday lenders are legally obligated to be truthful about any fees and charges associated with the loan. Additionally, they must be fully transparent about how much a loan will cost. Many lenders will provide representative examples of loan amounts to give borrowers an idea.

Before a payday loan is taken out, both the lender and the borrower must sign a loan agreement. This document will provide information about the fees and additional charges associated with the loan. In this document, the lender must specify the legal cause of any fees, interest, and additional charges. The borrower has the choice to agree and sign or not.

These additional fees can include but are not limited to fees for late payments, loan default on the borrower’s behalf, early repayment charges, and missed payments. However, not all lenders will charge additional fees. For instance, some lenders may not charge for early repayment of the loan.

It is the borrower’s responsibility to thoroughly read the loan agreement before signing anything.

Myth #6: It Is Cheaper To Use an Overdraft Than Get a Payday Loan

Some are under the impression that it is cheaper to pay an overdraft fee to a bank than it would be to take out a payday loan and pay interest.

However, what they forget is that the interest rate is a one-time payment which is calculated based on every £100 that the borrower receives. Conversely, overdraft fees are charged each time you withdraw money from the bank.

In addition, overdraft fees often lack transparency and are charged without the client being aware. In some cases, banks do not have to notify the client of overdrafts. Payday lenders, on the other hand, have all of their fees laid out in the loan agreement.

Maggie Clarke Content Ops Lead

Maggie leads the content operations team at Doddler.co.uk. She is an expert on personal finance, by way of a lifetime of gathering practical knowledge on what to not do with your pocketbook. When not blogging about money, Maggie can be found rambling through the roughest terrains. She considers herself charming yet troublesome and would love to meet you someday, just not today.