How to reduce payday loan reliance and restrict the cycle of debt?

Payday loans are small and instant cash options that help one finance emergencies quickly. The ease of loan approval, no loan documentation and guarantor requirement. These loans share high interest rates and APRs in comparison to other small loans. The APR on these loans may exceed £1500 or more. However, the interest cap of 0.8% per day protects the financial well-being of the borrower.

At the same time, around 1.4 million individuals in the UK use short-term (payday) loans annually. One takes out the loan out of habit and the facility of applying without re-entering details if applying with the same loan provider. However, you may be accumulating debt instead of meeting your needs.

It is especially true if you struggle to meet necessities without a short-term loan. It may affect your long-term future and financial ability to achieve your goals. You need to break the cycle of depending on short-term and expensive payday loans. The blog lists certain tips that might help you reduce reliance on these income-based loans.

Key Takeaways :

• Stop CPA on payday loans after informing the creditor of low potential to pay the payday debts
• Payday loans have an APR of 1500%. Check other affordable options before tapping it.
• Build an emergency fund to counter emergency expenses
• Compare interest, APR and total costs before borrowing any loan
• Check alternatives to payday loans, like small loans, 12-month loans, as a cheaper option.

What are payday loans?

Payday loans are high-cost credit ideal for meeting short-term emergency requirements. These are highly income-based loans that help you qualify if you meet the affordability parameter.

You may get up to £5000 on these loans for a period of 12 months. The repayment amount stays fixed over the loan term. It is an unsecured loan that does not require one to provide collateral. This, paired with no guarantor and low documentation requirements, makes the loan expensive.

You can use the loan for aspects like medical needs, funeral costs, car maintenance and repairs, and small business needs. However, one must compare interest and other loan options before applying for a payday loan.

What immediate actions can you take to break the payday cycle?

You must take a few actions immediately to break free from the payday loan cycle. These are:

1. Contact your loan provider to negotiate

Inform your loan company about the difficulty you are experiencing with paying the payday dues. Try your best to negotiate the pending dues.

2. Stop the CPA on payday payments

After informing the loan company, stop the continuous Payment Authority for direct debits on payday loans. It may restrict you from emptying your bank account.

3. Try to pay the part-payments

Understand how much you can still pay on the payday loans. Inform the loan provider. It may still help you prevent your credit score from a significant negative impact.

What can you do to reduce dependency on payday loans?

There are certain ways in which you can reduce dependency on costly payday loans and break the cycle of debt and accumulation. Here are some aspects to consider while taking a loan for a chequered credit history (specifically) :

1) Consider other bad credit loans

Always compare your options before taking a payday loan. There are certain bad credit loans to get from a direct lender online. It could be small loans, 1000-pound loans, 12-month loans and mobile text loans for your needs.

These are available at better terms and at a low interest rate in comparison to payday loans. You pay less in total and in interest on these loans. Comparing interest, APR and total loan amount to pay helps you fetch an affordable loan. However, before applying for a loan for bad credit:

• Pay some of the pending debts
• Update your credit report by reporting errors
• Apply for only the required amount
• Pre-qualify instead of applying directly

2) Build an emergency cash buffer

If you don’t have an emergency fund, you are eroding your savings unknowingly. An emergency fund helps you save a fixed amount for 6-8 months. You can use the account to counter any critical and non-negotiable emergency without panicking due to cash constraints.

If you save £1000 monthly, you can easily build savings of up to £8000 in 8 months, plus the interest you get on the savings account. It prevents you from tapping into any expensive instant cash sources like Payday loans.

3) Develop a budget and stick to it

According to Citizens’advice, “1 in 3 women and 1 in 4 men face financially vulnerable situations as the cost of living pushes the spending beyond the monthly income.” Therefore, it is highly important to have a budget in place to avoid expenses from exceeding the income.

One can set it by understanding the monthly expenses and income. Check how much you can save without affecting the basic bills and payments. Stick to it for at least 3 months to check whether you can manage and restrain debt. You can change the budget according to lifestyle and income changes. However, after making the budget, make sure that:

• You don’t give in to instinct-based purchases
• You don’t take unnecessary credit cards
• Apply for a high-cost credit, such as overdrafts
• Spend heavily on luxuries

4) Replace payday loans with low-cost credit

Yes, some personal loans may help you meet your needs more cheaply than a payday loan. Here is how:

Thus, you can see that there are other loan options that you can check instead of payday loans to meet your needs. In some cases, you may even get better amounts at low interest rates and better repayment flexibility. For example, you can check small loans for bad credit from a direct lender online instead of a payday loan to meet your needs affordably.

5) Save for basic survival needs

You can create a survival budget that’s different from the usual one. It prioritises saving money for important aspects like rent, utility payments, food, transport and important debt payments. For this, you need to understand how much you spend monthly on these aspects. Accordingly, save a flexible amount that should be higher than what you just calculated.

Bottom line

If you want to reduce reliance on payday loans, you must review your budget. Identify where you spend the most time during the month. It may help you identify and reduce such an expense. Additionally, compare other instant loan options before taking a loan. It may help you fetch a lower interest rate and better loan terms.

Emma Parker

Emma Parker is a financial counsellor at LondonLoansBank and has been serving for over 5 years. She is a psychology graduate from the University of Glasgow. Since she has keen interest in the finance field, she pursued a diploma course in banking and finance that led her to opt for her current career. She assists people choose the best loan based on their current financial situation and credit score. As Emma understands how people react to money problems, she gives them a helping hand to solve their financial complications.