5 Tips for Avoiding the Hidden Costs of a Payday Loan
Hidden Costs of a Payday Loan – Payday loans are considered to be a quick and easily accessible form of credit. Usually repaid before your next payday, these are handy when you are out of liquid cash. Though they do not come with too many strings attached, they are high-interest loans. They can be a tempting option to use but are recommended only when you have exhausted other low interest options. However, if they are used responsibly & sensibly, payday loans can be incredibly useful in tackling emergencies.
Let’s explore 5 ways you can avoid hidden costs when applying for or using a payday loan.
Avoiding the Hidden Costs of a Payday Loan
1. Do Your Due Diligence
Payday loans are widely available and easily accessible. A feature that can be equally misused just as much. It is common sense to do your due diligence on your lender, even more so if it’s online. Not only does this help you from falling prey to potentially risky & unreliable lenders, but it also helps you stay better informed.
Even if you did find a credible lender who meets your criteria, it is incredibly important to read up the fine print to avoid hidden fees. Lenders are often known to include them ambiguously in legal jargon that may confuse borrowers. Look for terms like penalties, non-repayment fees, extra fees for extending the loan period, and the all-too-common processing fees. These hidden costs can prove burdensome in the event you struggle to repay.
2. Bad Credit & Payday Loans
Let’s assume you already have bad credit or a poor credit score. How do you get a bad credit payday loan? Fortunately, a poor credit score or bad credit doesn’t stop you from qualifying for a payday loan. But you must ensure that you not only find a credible lender who’s straightforward regarding terms & conditions but is also reasonable & fair with their interest rates.
You’ll find lenders who specialise in bad credit payday loans easily. What’s important to bear in mind with these is that you repay your payday loans quickly whether you have bad credit or not. Consistent loan repayments are known to improve your credit ratings even if you have bad credit. The key is to not skip repayments and be within your loan repayment period.
3. Stick To Your Needs
The best way to avoid hidden costs associated with payday loans is to stick to borrowing limits or take payday loans in proportion to your needs. Payday loans are designed to give the borrower a much-needed cash infusion for emergencies; it is never advertised as a go-to cash option for two reasons. The first is the high interest rates that often accompany it. The second is that non-repayment of payday loans can reflect poorly on your credit score.
For example, say you’re taking a payday loan for home repairs that amounts to £800 and your credit score determines your borrowing limit is £2000. Unless necessary, it is best recommended to only borrow £800 regardless of a higher available limit.
4. The APR Variable
Most payday loan lenders advertise a certain rate also called the annual percentage rate (APR). If you’re considering taking a payday loan, you may have come across this rate. But when you apply for the payday loan, you’re given a different rate from the one that’s advertised. This is where you need to be vigilant and consider your options before signing on the dotted line.
The advertised rates are usually for those with average credit scores or who have no bad credit history. This is because lenders individually vary rates based on your credit history, especially in payday loans. They are under no obligation to offer you the advertised APR if you have a bad credit history. That said, you are under no obligation to take that payday loan either. You could always look for other options like credit unions and non-profit credit lenders that offer much lower interest rates.
5. Talking to the Money-wise
Payday loans are high-interest loans designed to give borrowers instant access to liquid cash. While there are credible lenders both online and offline that would give you fair interest rates, it may not always be the wisest choice to commit to them. What can you do? Talk to the financially savvy! If you’re considering a payday loan and want to avoid potential hidden fees/risks or understand your options better, your best bet is to talk to a financial advisor.
They can help you gather your financial options, reveal hidden costs in your payday loans, show how you can tackle your financial emergency better or even direct you to lower credit options. The best part is that you can get this financial advice for free. The National Debt Helpline, Citizens Advice and Payplan are some of them that have free financial advice you can make use of today.
Conclusion
The best ways to avoid hidden costs in a payday loan would often begin with doing due diligence. It’s easy to fall into a debt trap if you blindly believe your lenders without examining the fine print. We hope the pointers we discussed above can help you make better-informed decisions & help you become financially prudent.
