Various reasons abound why people get loans. The reasons seem to increase daily, especially since several loans are customed to meet an individual’s needs. People get loans when there is a medical emergency, need repairs on their homes, offices, or cars, need something to take care of themselves till they receive their next salary, etc.
The essential requirement for any loan is to have proof of your identity available, which makes a creditor know that you are indeed who you say you are; utility bills are often accepted as your residential address proof, and they also need information on your active bank account so that when you get approved, the money will be deposited into your bank account.
When it comes to getting loans, you can do it directly through a lender or a brokering service that acts as a third party between you and a creditor. One of such services is Payday Loans UK, which has a list of creditors to whom they connect their creditors. Their services are impeccable since the creditors they work with offer fair rates and use industry best practices to ensure that information is secured.
However, there are disadvantages of getting advanced loans on your paycheck that haven’t even arrived. It may be good and beneficial. But, its disadvantages are many, and they are:
High-interest fees
While getting a payday loan is good because you want to repay it when your next salary arrives. But what happens if you cannot pay it back then because other emergencies have come up that you didn’t even plan or think about?
Spending money you don’t even have yet is an unwise move because it carries a high interest with it and can make you lack money. Most creditors willing to give you these advance loans do it with the mindset that they are getting their money in a few days or months.
So, to profit from the lending services they render, they place high interest on them, which makes the payday advance loan option a significant disadvantage.
Costly fees
Loans have different fees attached to them like originating fees, fees for paying back the loan before time, prepayment fees, and fees for defaulting in the repayment plans, among others.
When all these loans are added up, they are costly for a borrower to pay back, which sometimes outweighs the benefit of getting them. Though there are generally high, it can be avoided if a borrower reads the terms of the agreement carefully before signing.
Sticking to the payback plan so you don’t have to pay additional charges is reasonable. It is necessary only to take out loans you can conveniently repay during the stipulated time.
Debt cycle
Stella Cooper, CEO at PaydayLoansUK said: “Getting a payday advance has led most borrowers to stay in a debt cycle.” Here, you are getting a loan with the mindset that you will be able to offset the bill immediately after your salary is made available. You use your salary to take care of the loan when you get your salary. You will need another loan to tide you through until the next salary arrives.
Some people get this advanced money to take care of an emergency. So, when they receive their money, they may have another emergency to take care of, and this means that they may fall into a debt cycle because they will always be looking for money to repay debts.
Avoiding this debt cycle is easy when you have plans in place on how to repay the payday advance loan, and you stick to it no matter what. You wouldn’t want to fall into a debt cycle that makes it hard or impossible to come out from.
Borrowing when it is unnecessary
Access to loans when you require them is good. But what happens when you take out a loan even when it is unnecessary, and you have absolutely no need for it? Instead of saving or budgeting their expenses, most individuals don’t do that because they know they can access any loan anytime.
Their credit rating may prevent them from getting loans from traditional sources like banks or credit unions. Still, it doesn’t prevent them from getting it through direct creditors, online loan agencies, etc. this has made some individuals not bother about working on their credit rating.
It often takes time to get out of it.
The payday advance loan option often makes it time-consuming for an individual to get out of. Sometimes, the loan could be short-term; other times, they are long-term, dragging out the period a borrower can use to pay back.
Sometimes, the prepayment clause makes borrowers not bother about paying back the loan earlier than scheduled because of the fees attached. When they use their money on other things, it can be hard to pay back when the loan is due.
It has risks
If you are getting a loan with security, it has the risk of losing your assets or property when you cannot pay it back. Some creditors had sued their borrowers in times past when they could not repay their loan since they have the right to institute the enforcement of these loans by bringing an action against a creditor.
Hence, creditors risk the fear of getting embarrassed because they failed to pay back a loan. It cannot be very comfortable getting sued over this, and most people may lose their social stand. They also risk their assets getting possessed by the creditor for the same reason, which is unfortunate.
Final thoughts
Loans can further decrease a borrower’s credit rating when they cannot pay back their loan because it reflects; this means that the possibility of getting a regular loan from a credit union or bank is nonexistent because these methods emphasize a rating before giving a loan. To prevent the possibility of getting a loan that is more disadvantageous than how beneficial it is, you can work with an agency to get a good loan.