Short Term Lending – A Godsend or a Nightmare?

Over the last decade, the payday loan industry has grown by leaps and bounds, evidenced by the high number of adverts for payday lenders. Like any new industry, it has experienced some growing pains, and regulation on lenders is not as clear and comprehensive as one would expect for a more fully matured business model. While most lenders are strictly above board in their operations, there are a few who will push to the limit to benefit themselves, sometimes in ways that don’t really benefit their customers.

By paying attention not only to the adverts, all of which showing smiling, joyous customers, but the warning sites as well (which, in all fairness, are as slanted as the adverts, albeit in the opposite direction), you can at least have a better idea as to what you are getting into with a payday loan, and avoid expensive mistakes.

Given the financial difficulties many in the UK and around the world have faced since the beginning of the Great Recession, it was inevitable that alternative lending services would emerge to meet the needs of people who were hardest hit, and who found themselves unprepared to handle the drastic changes in their earning potential.

The payday loan has clearly established itself by now as a popular means of obtaining quick cash. Along the way, some payday lenders have earned a less-than-sterling reputation, as have some of their customers. Government regulations have reined in the more egregious practices engaged in by some lenders, and if the loans are handled as intended they can truly be lifesavers. If mishandled or abused, however, payday loans can cause what should have been a straightforward transaction into a mushrooming financial burden. Knowing what you are getting into and practicing financial discipline can go a long way toward ensuring that your experience will be the former, rather than the latter.

When is a payday loan the right source of funds?

– When you are faced with an emergency – Unplanned expenses, such as a necessary repair to your home or automobile.

– To avoid going into long-term debt for a needed item or service – Even with the inherently higher interest rates and processing fees, it may be preferable to take out a payday loan to pay for the needed item, rather than taking on a long-term loan and making monthly payments.

– To pay for something you want or need right now, and for which you can budget repayment over the short term – Some examples might be your children’s school clothes for a new semester, professional equipment you need, such as a computer, a replacement for your old mobile phone, or even a vacation.

– When the interest and fees you will be charged do not significantly diminish the value of your purchase – Making a needed purchase at a discounted price, so long as the cost of the loan doesn’t exceed the money you’ll save on the item.

– When you have no other legitimate source of funds – Credit remains incredibly tight at banks and other traditional lending sources, especially for individuals who have a less than stellar credit history. Unfortunately, many people have fallen into this category since the recession.

What are the warning signs that you shouldn’t take out a payday loan?

– You are short of cash due to impulse purchases or extraneous shopping – People who find themselves unable to meet expenses because they have spent the money normally allocated to bills on something they wanted, but didn’t actually need, are best advised not to rely upon payday loans to make up the shortfall.

– You don’t know for certain when you will be able to pay off the loan – If you are counting on rolling the loan over and paying only the interest for an unspecified period of time, that interest, along with the other charges, can balloon rapidly, leaving you in deeper debt than you had planned for or are able to pay.

– You are not prepared for other extra expenses that might arise before you can repay the loan – If you do not have a reasonable amount for incidental expenses figured into your budget, you may find yourself unable to repay the payday loan on time, causing your interest to compound, possibly out of control.

– You do not set and adhere to a budget – People who are constantly scrambling to cover their basic bills will usually have trouble meeting the terms of a payday loan.

If you don’t fall into any of these “shouldn’t” groups, you may decide that a payday loan is the perfect answer to your immediate cash requirements. If you are unsure, The Consumer Council has a free online manual on payday loans that will help you come to an informed decision. And if you do decide that a payday loan is right for you, be sure to do some research, to find the lender whose terms and requirements are most beneficial to you. By being honest with yourself and educated about payday loans, you can best avoid the nightmare and reap the benefits that payday loans have to offer.