Payday Loans For Bad Credit

Updated: March 28, 2024 Author:

Key takeaways: Payday loans can be an option if you have bad credit and need money for an emergency as they can be easy to obtain. Payday lenders often aren’t interested in your financial history, only that you can pay the loan back in the here and now so a bad credit rating has little impact. They do come with high interest fees though and can trap people in a cycle of debt.

What Is A Payday Loan?

A payday loan is a short-term loan for a small amount of money. They’re designed to tide you over in emergencies. The idea is to pay back the loan in your next pay cycle hence the name, however, some lenders will offer a slightly longer repayment term. Payday loans are usually fairly easy to obtain and are available from high street shops and internet lenders. 

However, because they are a short-term loan with less stringent checks than other loans, they do come with very high interest rates. It’s worth comparing lenders’ fees to get the best rate; however, you should always check that lenders are approved by the Financial Conduct Authority (FCA) before taking out a loan. 

Payday loans are one of the easiest types of loan to secure if you have bad credit; however, they do come with downsides and can trap people in a cycle of debt.

How To Repay A Payday Loan

Most payday loans will be repaid via a continuous repayment authority (CPA) shortly after you receive your salary so it’s important to make sure you have enough money in your bank account to repay the debt. All this means is that when you take out the loan the lender will ask you to set up a CPA with your debit card so the lender can take the repayment money on the agreed date.

If you don’t have enough money in your account late fees will likely be added to the debt you owe. CPA can be cancelled through your bank or the lender but you will need an alternative way to repay the loan.

What Is The 14-Day Cooling Off Period?

The 14-day cooling-off period allows you to withdraw from the payday loan agreement within the first 14 days of taking out the loan. However, this isn’t a way to avoid your debt. If you’ve changed your mind about taking out a payday loan you will still need to pay off the full amount you’ve borrowed and any interest. 

You do usually have 30 days to pay back the loan after cancelling but if you fail to do so you will be hit with more interest and late repayment fees.

What Are The Advantages Of A Payday Loan? 

Payday loans don’t come with the best of reputations but if used wisely they can be beneficial to some people. 

Here are 4 advantages of payday loans:

  • They’re easy to secure: If you’ve had an emergency and need money quickly then payday loans are usually approved on the same day as you apply. The acceptance criteria for a payday loan is often much lower than for a traditional loan so once you apply and are approved the money should land in your bank account quickly. If you know you can repay the loan in your next pay cycle then using a payday loan for an emergency is fine.
  • You can get a payday loan with bad credit: Many other forms of lending can be difficult to secure if you have bad credit, however, payday lenders are more interested in whether you can repay the loan in the short-term rather than your financial history. 
  • Payday loans are unsecured loans: If you have bad credit, needing assets can be a hindrance to getting a loan. However, payday loans are unsecured meaning you don’t need to put anything like your house, car, or other valuables at stake to secure the loan.
  • The cooling-off period can be helpful: All loans come with a 14-day cooling-off period including payday loans. However, if you change your mind with a payday loan you will have to pay back any money you’ve borrowed plus the interest. You are entitled to get back any extra charges or fees you’ve paid though which can be helpful considering the high fees that are usually associated with payday loans. 

What Are The Disadvantages Of A Payday Loan

Taking out a payday loan isn’t a decision that should be made lightly and it’s important to weigh up the pros and cons to see if it’s the right option for you.

Here are 3 disadvantages of payday loans:

  • They can lead to a cycle of debt: You should never take out a payday loan if you know there’s a chance you won’t be able to pay it back on time. Payday loans come with costly fees and high interest and you could end up owing a lot of money. Many people then take out another loan to repay the first one and get trapped in a cycle of debt.
  • You pay back a lot more than you borrow: Payday loans have some of the highest interest rates of any loan. Because they’re taken out over a short period, the interest fee is usually quite large. Also if you do have bad credit you could be hit with an even larger interest fee than someone with good credit. You end up paying back a lot more money than you borrow.
  • CPA gives lenders access to your bank: As discussed CPA is usually set up to repay the loan however lenders can try this method to get the money they’re owed. Lenders are only supposed to use CPA twice to get a loan back and you can cancel CPA at any time but it’s still something to be cautious of.  

Payday Loan Alternatives

For a one-off emergency loan, there may be better alternatives than taking out a payday loan even if you don’t have any savings. Asking family and friends for a short-term loan could be one option but you should ensure that you can pay them big to avoid disagreements. 

Using a credit card or an arranged overdraft could also mean you incur fewer fees but again you should ensure that you can pay this back as you will get into debt with overdraft fees and credit card interest.