There’s been a lot of controversy in the financial world over the last couple of years when it comes to things like short-term loans, or payday loans. Although they appeared to be almost everywhere in the media for a while, with new companies constantly cropping up to give people access to the finance that they need while they wait for a pack check to come through, many problems arose when people realised that the interest they were expected to pay for borrowing just a tiny amount of money was astronomical.
Since the time of the very first payday loans, changes in regulations have been put in place to prevent short-term loan providers from taking advantage of the financially vulnerable as much as they once did, with loan terms that couldn’t possibly be repaid, leading to huge amounts of debt. However, because they are still a feature in today’s financial world, it’s important to make sure that you understand what payday loans actually are, if you’re considering your lending options.
What is a Payday Loan?
First things first, a payday loan is simply a short-term loan that was originally designed as a solution to help tide people over financially if they are struggling with expenses before their payday arrives in any given month. Some payday loan companies offered consumers the opportunity to choose their own period for repayment, depending on when they received their salary, and how they could use their money appropriately for the comfort of themselves and their family.
Payday loans became popular very quickly, because they were accessible to a host of different people from different backgrounds, and often didn’t require a great credit history to access. In most cases, payday loans were sent straight to an applicant’s bank account within around 24 hours of their application being approved. From that point, the repayment, plus the interest that you had generated on that loan, would be taken out of your bank account on the due date.
Today, the advertised interest rates and actual APR charged on payday loans are much lower than they once were, but they can still be very high. Typically, payday loans charge around £24 a month for every hundred pounds that you borrow. This can mean that some people still take out payday loans and struggle to pay them back according to the schedule or terms that have been laid out for them.
Logbook Loans vs Payday Loans
Some people wonder whether logbook and payday loans are the same thing, but the truth is that they’re actually very different. Logbook loans are a type of secured loan that mitigates risk by using your vehicle as backup, so if you cannot make repayments for any reason, then you might find that you end up losing control of your vehicle, on top of being required to pay back extremely large interest charges. Because there are usually no credit checks involved with logbook and payday loans, customers who are struggling with debt and history problems can often be tempted by these loans, but they may also put their finances and vehicles at risk.
The Alternatives to Payday Loans
In cases where you feel that you’re absolutely desperate for cash, it can sometimes feel as though payday loans are the simplest, or even the only option that is available to you. However, most of the time there are other options available that can be far less risky and detrimental to your overall financial health.
For instance, there are such things as “current account authorised overdrafts” which are often much cheaper to access than payday loans if you’re interested in borrowing money for only a short amount of time. However, unauthorised overdrafts are often more expensive than you would expect, so it’s important to avoid those at all costs if you’re looking for quick and easy ways to access small amounts of money over a short period of time.
Another option that could be available to some people in search of financial help, could be to join up with your local credit union. Although the loans that can be issued by credit unions can take much longer to set up and arrange on your behalf, the APR is limited to a maximum of 42.6%, compared to percentages in their thousands with payday loans.
Most of the time, even the specialist credit cards that are aimed specifically at people with a damaged credit history can offer a better deal and lower interest rates than payday loans. Even if you’re given a high APR of only 30%, you’ll still probably pay far less interest with this type of credit card, particularly if you are disciplined enough to make sure that you pay off your balance quickly. Of course, if you only make minimum repayments and miss payments, then you could face penalty charges and damage to your credit rating.
Credit unions are designed to allow people within a particular organisation or community save up money and borrow extra finance when they need it most. Within the UK at this time, there are hundreds of different credit unions, which means that almost everyone will have access to at least one. There are also a host of different work-related credit unions available. For instance, for NHS employees, employees in the transport industry, and trade union members.
Until around 2012, the credit unions that we know today were somewhat hampered by restrictions that meant each of their members had to have some kind of common bond, such as working for the same employer or living within a specific geographical area. However, today, credit unions aren’t required to make sure that all of their members have a specific characteristic in common. That means that all credit union solutions generally grow and be offered to new groups with greater ease.
How Do Credit Unions Really Work?
In simple terms, credit unions are controlled and owned by their members, so there are no outside shareholders that not to be paid off. These unions are run almost exclusively by volunteers that have been elected by the full membership, and any profit that is made by a particular credit union will be used to develop the organisation and offer a greater return to those involved.
Loans taken from credit unions are often much less expensive than the loans that can be obtained from other providers when it comes to small amounts of cash and they generally don’t have any fees for setting up, early-redemption fees, or set-up fees either. For instance, many credit union loans will cost around 1% a month on the reducing balance of a loan.
Of course, there’s always the possibility that some credit unions will charge more in interest than the standard, though the law dictates that the amount of interest charged by any credit union can never be more than 3% in any given month.
The Advantages of Credit Union Loans
Credit union loans offer a host of great advantages which make them particularly competitive in comparison to other bank and building society lending schemes. For instance, credit unions offer competitive rates on small personal loans, and can generally provide finance for smaller amounts than other standard loans. Additionally, the interest paid is charged on the reducing balance of the loan, which is great for people who want to pay on a weekly basis and limit the amount of interest they pay overall.
When you borrow money from a credit union, you can pay back the finance that you have obtained from numerous different channels, including options taken straight from your wages through a payroll deduction, or through benefits. Credit union loans also avoid any hidden charges or penalties that might be imposed by banks or building societies if you choose to repay the loan early. If someone chooses to take money from a credit union in a loan they will usually be encouraged to save in the same place. This usually means that by the time you have finished repaying your loan, your savings will have accumulated more too.
Who Should Get a Credit Union Loan?
Typically, credit unions are happy to lend out small sums to different people, but they’re also more commonly providing larger amounts of credit for larger purchases, and even mortgages in some cases. Most commonly, credit unions will only provide personal loan options for a period of up to five years, or ten years when the loan has been secured on the property of the borrower. However, some unions are able to offer finance for up to ten years, on unsecured loans, as well as 25 years of lending terms for secured loans.
In the past, if you wanted to borrow money from a credit union you would need to have had a history of saving with that union first. However, today, most unions will not insist on this background to give you access to credit. If you have any questions about the rules and regulations of your credit union, it’s best to ask them yourself and gather as much information as possible before lending any money.
How to Find your Credit Union
In order to obtain a loan from a credit union, or even begin saving with one, the chances are that you should consider your options carefully. In the past, you needed to choose a union that was connected to your employer, organisation, or where you live and work. However, the law has now changed to allow credit unions to act more flexibly in the way that they serve credit. Unions often have some restrictions in place for memberships, but they also now have the power to change their rules and make changes to the concept of a “common bond”.
Simply head online and type in your local area name alongside “credit union” to start finding out what’s available to you.