The world of payday loans can seem very complex, and many people believe things that are simply not true. In this article, we will help you separate fact from fiction and deliver the essential information about payday loans you’re looking for.

Like most things in life, payday loans come with various pros and cons. It’s important to be aware of the advantages and disadvantages before you apply for one or write them off completely.

Do payday loan companies target the vulnerable?

Many people think all payday loan companies target vulnerable people. Whilst some loan providers are less scrupulous than others, certain companies make stringent affordability checks before they allow people access to finance. In many territories, tougher legislation has come into place to stop lenders preying on vulnerable people who may struggle to repay their loans. This legislation has also stopped lenders adding debilitating late fees and charges when borrowers are unable to pay.

Has the industry improved?

Legislation has forced lenders to act in a much more responsible manner and to offer advice and support about debt management. Lenders have also been instructed to suggest alternatives to taking out payday loans. In the UK, lenders need approval from the Financial Conduct Authority before they can offer payday loans. Some poor-quality lenders were forced to exit the market, whilst others had no choice but to operate more humanely if they wished to continue lending.

Is a payday loan likely to result in vast debt problems?

Payday loans don’t always result in spiralling debt. Applications are much less likely to be approved if it seems someone may struggle to repay. Far fewer applications are approved these days due to changes from the FCA which are designed to protect people from entering into loans they will not be able to afford to repay. If someone does struggle to repay a loan,most lenders have a service in place to provide a reduced repayment plan to help borrowers manage their debt more effectively. Those that don’t willingly oblige such a plan will be forced to do so under new legislation.

Are payday loans mainly used by vulnerable or impoverished people?

Another common misconception is that payday loans are only used by people on meagre incomes. However, research shows us that payday loans have been taken out by people from all walks of life. Someone with a healthy income may take out a payday loan because a payment to them has been delayed or because they have been met with an unforeseen expense such as a car repair bill. Payday loan provider Wonga reportedly described a snapshot of their most common customer demographic who responded to a survey as ‘professional women between the ages of 25 and 34’.

Are payday loan interest rates still very high?

Payday loan interest rates are not as high as they once were. In countries across the world, rates have become much more customer-friendly. In the UK, the overall charge on a loan cannot be more than double the amount originally borrowed even if they don’t pay on time.

Are payday loans used as a last resort?

While this is true in many cases don’t be warned off this option if attempts to raise finance quickly elsewhere have failed. One of the most common reasons for taking out a payday loan is to gain much quicker access to funds. Other forms of lending can mean waiting longer for money to reach a bank account, whereas a payday loan customer can access the money within minutes. If time is the name of the game, sometimes speed will save you money in the long run. Of course this all depends on your own specific circumstances. In many cases having the foresight to arrange an overdraft on your credit card will afford you credit access just as quickly (though can come with its own pitfalls too).

Will my credit score be affected if I pay on time?

Despite the changes in legislation and the way payday loan companies operate, it’s still important to be aware of the dangers attached to taking out this kind of finance. A payday loan application won’t normally hurt your credit score, but your loan could impact it if you cannot pay back on time. It’s worth noting that some lenders view payday loans differently to others, so you could be refused credit even if you have taken one out and repaid it promptly. In some cases, repaying early may cause a slight improvement to your credit score, though this is not guaranteed and the rules for this vary between different credit score reports.

Can I be charged for early repayment? Are payday loans safer now?

Some lenders may charge you for early repayments, though others may give you a discount. The terms can vary considerably from one lender to another. It’s very important to note that debt spirals can still happen despite the tightened legislation, especially if you take out multiple or considerably large payday loans – even if you can only be charged double in your country, you could end up paying an extra £500 for each £500 you borrow many times over for each loan.