Call free today: 0800 0431 431
Monday mythbusting: 5 common misconceptions about payday loans article
Monday mythbusting: 5 common misconceptions about payday loans article

Payday loans are a popular form of borrowing, offering people with cash flow problems the chance to get a short-term loan that they can repay when their next wage arrives.

The issue with payday loans is that interest rates are extortionate, and people using them as a form of emergency savings often run into trouble when it comes to paying them back.

In the latest article from our mythbusting series, we examine some of the most common misconceptions surrounding payday loans, and lay out the facts behind them.

We have a wide range of debt management solutions that could help you write off up to 81% of your debts

Check if you qualify

1. They’re a harmless way to tide me over until payday

One of the biggest misconceptions people hold about payday loans is also one of the most understandable – that the name ‘payday loan’ allows people to view this form of credit as a harmless way of borrowing cash until payday.

Payday lenders play up to this perception. They often advertise their products in a friendly, less pushy way, and make sure not to ‘oversell’ the financial side of things.

In contrast to banks and other lenders, payday lenders also focus on smaller loans, in amounts like £50 or £100; the kind of money you might borrow from a friend or parent.

The truth is, payday loans can be anything but harmless. While there might be smaller sums involved, that’s because target customers tend to be people who are so desperate they’re willing to take out a loan for a small sum, while – as we’ll cover in our next myth – interest rates can be sky-high.

2. I can use payday loans as an emergency savings account

Financial emergencies happen for all kinds of reasons. Maybe you’ve had your shifts cut back at work, you’ve been hit with a fine, or you’ve come across an unexpected bill.

For some people who have savings, they’re able to rely on a financial buffer that allows them to handle unexpected costs. For others who don’t have the luxury, on the other hand, they’re only one bad luck story away from falling into debt.

These are exactly the type of people who fall victim to payday lenders. It’s easy to see the attraction – a short-term hit of cash that will allow you to take care of a short-term problem. The issue with treating payday loans as an emergency savings account, however, is that it can cause longer-term concerns.

That short hit of cash comes at a cost. Payday loans typically come with an interest rate of around 1,500% compared to 22.8% APR for a typical credit card. For those who don’t have savings, they run the risk of being hit with further charges from missed payments, which can lead to a dangerous cycle of debt and further borrowing.

3. Payday lenders are just as trustworthy as banks and building societies

People tend to put their trust in financial institutions. Whether you’re borrowing from a bank or a building society, the public have come to expect a certain level of expertise from lenders, and usually trust that they aren’t being scammed.

Payday lenders are financial institutions of sorts, and that leads us to our next myth. The fact that they offer loans, in the same way as a mortgage lender or bank, leads people to place payday lenders in the same category as other high street lenders.

It’s important to note that payday lenders operate completely differently. While most responsible lenders will run a credit check before deciding whether they can trust you to repay what you owe, payday lenders don’t care about your credit score, and actually use that as a selling point.

They will, quite literally, lend money to anybody. And while that may sound like a good thing, it creates a system where the people most attracted to payday loans are those who can’t borrow money elsewhere. This makes it easier for the more predatory payday lenders to take advantage of people in a fragile financial situation.

4. As long as I pay it in full, a payday loan can’t hurt me

With most forms of credit, whether it’s making your latest mortgage payment, or settling your credit card bill at the end of the month, your financial profile can’t be harmed as long as you repay what you owe on time and in full.

In fact, borrowing money and promptly repaying it can actually help boost your credit score. It allows you to build up a positive payment history, something credit reference agencies will take into account when deciding what your credit rating should be.

Up until recently, payday loans were no different. Although the interest can be astronomical, as long as you pay what you borrowed plus any additional charges, a payday loan wouldn’t have an adverse affect on your financial future.

Unfortunately, that’s no longer the case. As reported by Mortgageable and many other outlets, mortgage lenders’ attitude towards payday loans has recently shifted. Having a payday loan now makes it harder to get a mortgage, even if you’ve paid it back in full.

With big mortgage providers like Habito and London & Country now refusing applications from anybody who has a payday loan that’s less than two years old, it’s most definitely a myth to say payday loans won’t harm your profile in the eyes of lenders.

5. I can settle my payday loan debt at a time that suits me

The original model for payday loans meant that you would borrow an amount to tide you over until payday, and pay back the amount you borrowed whenever payday arrived.

Since then, the model has changed slightly so that certain companies offer borrowers more flexibility. Some providers allow people to choose the repayment period, meaning you could have seven days or seven weeks to repay your debt, depending on what you feel comfortable with.

You might think that puts you in control of your repayment period, but it doesn’t – and that’s because of something called a Continuous Payment Authority (CPA). A CPA is baked into many payday loan agreements. Put simply, by signing the agreement, you’re allowing the payday lender direct access to your bank account.

This empowers the lender to take recurring payments directly from your account. They can do this whether you have budgeted for the payment or not, and it can be hard to revoke if you’re struggling financially. This ultimately leaves you with little influence over the timeframe for repaying your payday loan.

We have a wide range of debt management solutions that could help you write off up to 81% of your debts

Check if you qualify

Maxine McCreadie

Maxine is an experienced writer, specialising in personal insolvency. With a wealth of experience in the finance industry, she has written extensively on the subject of Individual Voluntary Arrangements, Protected Trust Deed’s, and various other debt solutions.

How we reviewed this article:

HISTORY

Our debt experts, and insolvency practitioners continually monitor the personal finance and debt industry, and we update our articles when new information becomes available.

Current Version

May 31 2021

Written by
Maxine McCreadie

Edited by
Maxine McCreadie