11.1.2022

Should You Get A Payday Loan If You Have Low Credit?

Should You Get A Payday Loan If You Have Low Credit?

Whether it’s for bills, travel, or unexpected outgoings, many people turn to payday loans when they need emergency cash quickly. Payday loans are easy to apply for online, and with promises of cash in your bank account the same day, they’re a tempting proposition for the millions of people who are being hit by the cost of living crisis.

The 2008 financial crisis saw a sharp increase [pdf download] in people accessing payday loans. And as countries around the world enter a new period of financial uncertainty, many people could turn back to payday lenders.

So is it a good idea to take out a payday loan if you have bad credit? In this article, you’ll learn:

  • what a payday loan is
  • if you can get a payday loan with a low or no credit score
  • alternatives to payday loans.

What are payday loans?

Payday loans are short-term loans that have very high interest rates. According to Money Helper, the UK government’s financial advice service, payday loan companies charge an average annual percentage interest rate (APR) of up to 1,500%. Typical credit card APR is 22.8%.

In 2014, the government put laws in place to limit the amount payday loan borrowers have to pay back. Daily interest rates are capped at 0.8%, and nobody will ever pay back more than twice what they borrowed. If you take out a one-month payday loan and make your repayments on time, you won’t pay more than £24 in fees for every £100 you borrow.

Payday loan example

Let’s say you’re struggling to find money for emergency pet care. You decide to take out a payday loan of £300 and agree to pay it back over one month at a daily interest rate of 0.8%. Excluding fees, and assuming you make your monthly repayment on time, you’ll pay £72 in interest. So in total, you’ll pay £372 back to the payday loan company.

If you’re late with your repayments, the amount you owe can quickly spiral out of control. At the end of the first month, you’ll owe £372 — so if you don’t pay it back, you’ll be charged 0.8% per day on this new amount, rather than the original £300. There may be additional late payment fees and charges, too.

Why is APR so high for payday loans?

APR is the amount you’ll pay back on your loan over the course of a year. Because most payday loans are borrowed over much shorter timeframes, high daily interest rates are huge when extrapolated over the course of a year. Interest rates of 0.8% a day equate to approximately 1,250% over the course of a year.

These exorbitant APR rates are justified for speed and convenience. But it can get you into more financial trouble if you’re unable to pay it back on time.

Can you get a payday loan if you have a low or no credit score?

Payday loans are also sometimes known as bad credit loans. They’re often advertised to people with low credit scores, or those who don’t yet have a credit score. This is often the case for new UK residents, as well as young people and retirees who have paid off their mortgages. Learn more about UK credit scores for new residents.

Many payday loan lenders will perform a soft credit check on your account, which doesn’t impact your credit score. So they can be tempting for people who already have low credit scores.

Should you get a payday loan if you have a low or no credit score?

This is a more important question than whether or not you can get a payday loan. Ultimately, choosing whether to take a payday loan comes down to one question: will you definitely have the funds to pay it off on time?

If the answer is no, it’s a bad idea to get a payday loan. Costs and charges can quickly become unmanageable and cause more debt. Fortunately, there are some borrowing options that are less risky than payday loans. See some alternatives to payday loans below.

Do payday loans affect your credit score?

Payday loans are viewed differently by each credit reference agency (CRA) and lender. Some CRAs may reduce your credit score while you have an outstanding payday loan. For others, it will have no impact on your score, as long as you repay it in full and on time.

Different lenders also have different attitudes towards payday loans. Some may refuse you credit if you have a payday loan on your credit report, while others may be unfazed by it.

Unsure what a credit score is and how it’s used? Learn more in our credit score FAQs.

Alternatives to payday loans

Research suggests many people who turn to payday lenders do so as a last resort. But if you’re having problems with money, there are some alternatives that carry less risk and lower interest rates than payday loans.

Here are some of the most popular payday loan alternatives for people with low or no credit score:

  • Credit cards — credit cards are much more flexible and have lower interest rates than payday loans — and there are options available for people with bad credit. While you won’t get instant cash, you will get more sustainable credit. With most credit cards, interest is accrued monthly, so if you can pay off your credit card bill before the end of the month, you may not pay any interest.
  • Arranged overdraft — get in touch with your bank and ask to set up an arranged overdraft. Overdrafts aren’t designed to be used to make large purchases, but they can be helpful if you need a small short-term loan to tide you over until payday.
  • Rotating savings clubs — ROSCAs help you borrow money from family and friends in a sustainable way that supports the whole community. Instead of paying interest, you pay a set amount into a joint fund each month to cover the cost of your payout. Find out more about rotating savings and credit associations.

If you’re having trouble paying your bills or covering the cost of living, find out where you can get trustworthy financial advice. You can also get impartial information from Money Helper, or use services like StepChange for free debt advice.

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