Is a payday loan a good type of credit?

It’s always tricky to define “good” credit products, because often the success of credit depends on the individual consumer’s circumstances and how appropriate that particular type of credit is for them. For example, a bank loan might have a low APR of around 5%, and therefore may be deemed a good type of credit. However, if you only need to borrow £100, it wouldn’t be sensible to take out a bank loan of a few thousand. While the APR may be lower than smaller loan options, you’d end up repaying more in interest over the loan term because the amount you have borrowed is so big. Plus, a bank loan typically has a loan term of a few years, whereas you might be able to repay the £100 you needed plus interest on your next payday, in a few weeks’ time.

When it comes to payday loans, they are popular for various reasons, including their accessibility, small loan amounts that are appropriate for occasional cashflow issues and manageable repayments over a few months. Although payday loans have a high interest rate, they can still be an affordable borrowing option for emergency expenses, especially if you have a poor credit history and struggle to access mainstream credit elsewhere.

If you need cash quickly and you’re trying to find a good loan, there are a few questions you can ask yourself about payday loans to determine whether they would be a good loan option for you.

• Why do you need to borrow money?
• What type of credit are you looking for?
• How can payday loans help you?
• Can payday loans be unhelpful?

Reasons to borrow a payday loan

Choosing a loan product can be made much simpler by considering why you need to borrow. In some cases, you might not need to borrow at all; you may just need to rework your monthly budget. Payday loans are intended to be used for emergency expenses and only occasionally throughout the year. If an expense arises that you hadn’t budgeted for this month, but you can afford to meet the repayment out of your normal income, then a payday loan might be a sensible option. If you can’t afford to repay the full amount on your next payday, you may need to look at an alternative borrowing option that allows you to split the balance over several months or make flexible payments instead.

What type of credit should you use?

This is actually a similar question to why you need to borrow: the type of credit you should use depends on the circumstances that mean you need to borrow money and vice versa. Payday loans are a form of high cost credit which means they aren’t the cheapest product on the market however it doesn’t mean they aren’t a good type of credit. If you need to borrow more consistently, then a revolving credit product might better facilitate your borrowing needs. You should also think about how much you need to borrow to ensure that taking a revolving credit facility won’t encourage you to borrow more than necessary. If you find you apply for credit month on month, a payday loan would not be a suitable credit product.

How can payday loans help?

Payday loans are accessible to almost everyone – even if you have a low credit score, which means those often excluded from mainstream borrowing could still take out a loan to cover emergency cashflow shortfalls. The applications are online and easy to complete, and if you’re approved, the loan transfer often takes only a few minutes so they’re also a quick form of credit too. You can repay the balance over your next few paydays to split the cost, although it’s worth remembering that the longer you borrow for, the more interest you’ll have to repay (this is the same across all credit). Ultimately, payday loans are helpful if used only when necessary and after considering your other financial commitments and future monetary responsibilities.

When is a payday loan bad?

As with all types of credit, a payday loan is not a good option if you already have several debts, or you are currently struggling to meet your repayments on time. Borrowing money is never a solution to getting out of debt and will often only make your situation worse. Although the loan or credit facility itself might be good, it can exacerbate financial difficulty if used irresponsibly. If you start to rely on credit or your current financial responsibilities feel overwhelming, you might want to seek some debt advice. There are a few free debt advice charities online who offer personal debt advice and potential solutions to help you repay any loans and credit that you owe.

While payday loans may help some people, they won’t fit everyone’s circumstances and there’s no point using credit that’s not right for you. If you can, talk to family and friends about the type of credit they use – you don’t have to have a super personal conversation, but it can help you understand the potential options available. There’s also a wealth of information online about the different types of credit and when they might be suitable.

While we compare payday lenders, we know that a payday loan isn’t right for everyone. Sometimes, instead of borrowing money you might just need to adjust your current monthly budget. Money management takes a little time, but practising can help you make good financial decisions about credit and ultimately improve your financial health.