All You Need to Know To Choose the Right Payday Loan Lender
Payday loans are short-term loans that are typically paid back by the borrower on their next payday. These loans are particularly useful if you’re facing an emergency and need urgent cash.
Due to the nature of payday loans, they can act as quick financial relief to pay off your medical expenses or utility bills when you’re short on money. That said, it’s crucial to understand how these loans work exactly and the factors to keep in mind when choosing a lender.
If you’re considering getting payday loans to pay off your unexpected expenses, here’s everything you need to know about a lender before you commit.
1. Regulatory Compliance by the Financial Conduct Authority (FCA)
It is essential to ensure that the lender you plan to borrow from is authorised and regulated by the FCA. They’re an independent regulatory body that aims to protect consumers from fraudulent lenders.
Over the last decade, the FCA has introduced rules that defend borrowers from unfair lending practices like excessive interest rates and hidden fees. If your payday lender is legitimate, they should be licensed by the FCA to operate legally in the UK.
Additionally, when your lender follows FCA regulations, it gives you the peace of mind of knowing that they’re required to act fairly. An easy way to find out whether your lender is complying with the FCA regulations or not is by doing a quick search on the FCA’s website of approved firms.
2. Credit Score Requirements
According to the FCA, all authorised lenders are required to perform credit checks before they lend money to a borrower. If your lender claims that a credit check isn’t required for you to get a payday loan, chances are that they’re either fraudulent or intend to trap you in a cycle of debt.
A reputable payday loan lender will analyse your credit score along with your income and employment status, and only then give you the money accordingly. Lenders who offer “guaranteed approval” are typically red flags and you should avoid them to look for better alternatives.
That said, the credit score criteria for payday loans are more flexible than traditional loans, making it suitable if you have a poor credit history. If your credit score is extremely low, you might still get a loan, but the lender will ensure that the amount is repayable by your financial situation.
3. Interest Rates
The rates of interest for payday loan lenders differ from region to region and your financial situation. For instance, if you have an extremely poor credit score, you might still get a payday loan, but the interest rates would be higher than normal.
Additionally, payday loans in general have higher interest rates than traditional loans since they’re meant for short-term and have short repayment periods. However, a responsible lender will provide you with all the information that you need transparently before giving you the money.
By law, a payday lender is required to disclose the Annual Percentage Rate (APR) of their loans before an agreement is signed. If your lender doesn’t seem truthful about their interest rates and APR policies, it could hint at unethical practices.
4. Repayment Structure
Typically, you’ll be given up to a month to repay your payday loan plus interest, meaning that your loan would be due in 14-30 days, depending on the lender’s terms.
Reliable lenders will ensure that your repayment terms are flexible as per your financial situation. Additionally, they would allow you to pay off your payday loans earlier than the due date without additional charges or penalties.
Some payday loan companies also offer a “loan rollover” option where your loan is pushed back to the next month. While this gives you extra time to pay off your current loan, it requires you to make a new agreement with the lender with extra interest and charges.
5. Penalties
As opposed to what was mentioned earlier, unethical lenders might charge you extra fees if you make a repayment earlier than expected.
On the other hand, you may have to pay a late fee if you fail to make a repayment on time. Thanks to the FCA regulations, the maximum late fee for a payday loan in the UK is capped at £15 plus interest.
This makes it crucial to ask your lender about these penalties upfront and be clear about the repayment terms. Before signing a loan agreement, carefully review the terms and conditions to understand the penalties for late or early payments.
To Sum Up
While payday loans are a good financial tool to opt for if you’re in an emergency, it’s essential to make sure that your lender is legitimate, both legally and morally. Borrowing money from the wrong lender could put you in a cycle of debt.
A reliable lender will assess your financial situation and treat you fairly while being transparent about their terms and policies. Take the time to do your research on the various lenders that are available to you, and weigh their pros and cons.
If you have any doubts about any of their conditions, don’t hesitate to ask them about it for clarity. Only commit to a payday loan after you’re certain about the choice of your lender.
