Payday loans, a type of short-term loan designed to cover emergency expenses, can be used for many different reasons including covering unexpected medical bills, home or car repairs. There is no correct or exclusive use for this type of finance but typically it will be used for short term emergency expenses and unexpected bills and costs.
What is a Payday Loan?
A payday loan is a form of short-term loan designed to cover unexpected expenses. They are known for their accessibility and speed, not requiring a strict credit check or for the borrower to put down collateral. Unlike secured loan options like second mortgages (read more) and typical mortgages
This easy access makes payday loans some of the quickest loans available, often able to get money into a borrower’s account the very same day. However, payday loans are also known for their very high fees and interest rates and must be used with caution.
Who Uses Payday Loans?
According to Finder, there are certain commonalities between payday loan users in the UK. For example, the typical payday loan borrower is unmarried, younger (between 25 and 30 years old), living in rented accommodation, and earning a low income of below £1,500 per month.
The average payday loan amount is £260 and the most common amount borrowed is £100. The vast majority (75%) of payday loan customers took out more than one loan annually – the average being 6 loans per year.
Hugo Anglesford of Doddler.co.uk explains: “A payday loan, like any short term loan can be used in times of financial difficulty and when you find yourself facing a financial emergency with nowhere else to turn. It is always important to remember though, that these loans are not designed to be a first port of call. Rather, they are an option that may be available when there are few other places or options to turn to. Used correctly however, they can help you out of a difficult situation.”
Why do People Use Payday Loans?
There are many reasons why people may choose to use payday loans to get funds. Here are some of the most common reasons.
Losing their Job
If someone is made redundant, they might find themselves struggling financially, especially if they have no money saved for a rainy day. Redundancy payments may not be immediately available, often withheld until the end of the redundancy period. In the meantime, it can be difficult to know where to get hold of extra money. Payday loans allow individuals to borrow money until their next paycheck meaning that those who have lost their jobs can have quick access to their job until their redundancy pay comes through or until they have secured their next job.
To Prevent Asking Friends and Family
It can be difficult to admit that you are in debt and many find it too embarrassing to turn to their friends and family when it comes to financial matters. Consequently, they may turn to payday loans instead to tide them over. Payday loans allow them to stay afloat until their next payday, upon which they can repay the loan. Unlike borrowing from family and friends, payday loans are totally impersonal and have none of the emotional implications.
To Consolidate Debt
Consolidating debt is one of the major reasons why people choose to take out a payday loan. Rather than having multiple loan repayments per month, with different dates and lenders, many prefer to streamline their debt with only one repayment per month to one lender. However, this is not necessarily a good strategy for payday loans as the interest rates are notoriously higher. Payday loans might be a way of getting debt under control and steadily paying off your loans but you should always calculate the different interest rates of the loans and see whether this option actually saves you money.
If You Have Bad Credit
For those who have bad credit, it can be challenging to borrow money. Lenders tend to be more skeptical about lenders who have a poor credit history or who lack a credit history entirely. However, with payday loans, there is no need for a credit check and eligibility criteria is a lot more relaxed. This means that people can qualify for a payday loan relatively easily, regardless of bad credit. Payday loans are one of the most viable options for those with bad credit.
