Payday Loans or Unsecured Loans?

Payday loans are a product that most of us are familiar with. We may not know the ins and outs but we have all read the headlines, both good and bad. They are aimed at people struggling to wait until their next ‘pay day’ and are usually small amounts of up to £1000-£1500 maximum. However the repayments can still, be very high as the loan is over only a short term, usually a 4 week period. This pushes the interest rate up and rates of up to 400% are not unheard of. A failure to repay the loan on time also results in additional charges and fees which ultimately increases the amount owing. In such uncertain financial times, with the costs of living rising and wages stagnating it is no wonder that an increasing number of people are struggling with payday loans.

Despite all the potential issues, applications for payday loans continue at a rapid rate. Perhaps this is due to a lack of understanding about other options, or is it just that these customers have no other options?

When it comes to lending, the most competitive interest rates always tend to be applied to secured loans.  This is because the loan uses an asset as security, so if you fail to keep up repayments then the asset used can potentially be at risk.  The best example of this is property, and those with high levels of equity within their homes will be the ones offered the most competitive interest rates. Most people that are considering a payday loan however, do not often own their own home, or have nothing of significant value to secure the loan against. Plus secure loans tend to be very high value, at least £15,000 plus, so not the right product for those just looking for a smaller amount.

Thus, personal loans or unsecured loans may be a more realistic option. Firstly the amounts that can be borrowed are much smaller and typically start from £1,000. Secondly the interest rates are significantly lower than a payday loan as the borrowing is over a longer period usually between 12 months-60 months and, as it’s an unsecured loan, there is no requirement to use any asset to secure the loan against.

Whether or not someone is approved for a personal loan depends, by and large, on their credit rating. Someone who already has a payday loan, and has defaulted on at least one of these loans, is less likely to be approved. It is possible however to use unsecured loans correctly, and thus you may not feel the need to take out a payday loan unless it is absolutely neccessary.

Use local charities, free debt advisors and the Citizens Advice Bureau to properly research all your options before you decide.