Payday loans have been around for years and they aim to help people who would usually be excluded from accessing mainstream credit to manage their cashflow. In order to apply for any kind of credit in the UK, generally you have to undergo a creditworthiness and affordability assessment. Part of the creditworthiness check includes the lender looking at your credit file to assess whether you are likely to repay the loan or not. Unfortunately for some people, having a poor credit history is not necessarily their fault, and it doesn’t mean they shouldn’t have any access to credit when they really need it. For this reason, payday loans can be very helpful.

However, payday loans have a high interest rate, so they shouldn’t be used for just any reason, and using high cost credit irresponsibly can cause serious money problems. So, what can you use a payday loan for? We will look at:

  • The purpose of a payday loan
  • Examples of when you might use a payday loan
  • When you should not use a payday loan
  • Alternative types of credit for people with bad credit

But firstly, what is a payday loan?

A payday loan is a type of high cost short term credit which you can borrow for up to a month to help you bridge the gap between paydays. “Payday loans” is often used as a general term to include instalment loans which you can borrow over several months. In both cases, you make an application, usually online, and if the application is approved then the lender transfers the funds to your bank account. Then, you make the repayments upon your agreed repayment dates until the loan is settled.

The purpose of a payday loan is to help people with bad credit who would struggle to be accepted by normal credit providers. The applications are quick and non-invasive, and you receive the decision (and funds if approved) within minutes, making them accessible, even in times of emergency.

There are some things you need to consider before applying for a loan, such as:

  • Is the loan really necessary?
  • Can I afford the repayments?

Although these questions are especially important with payday loans, they are good things to consider before applying for any kind of credit, and before using existing credit facilities.

What should payday loans be used for?

Generally, payday loans should only be used on an emergency or urgent basis, where not paying an unexpected bill could result in arrears or loss of income, for example. Ultimately, you should only apply for a payday loan if you will be in a better financial position once you have repaid it.

Examples of reasonable uses for a payday loan

Of course, “emergency payments” is quite vague, and can vary depending on what you might consider to be urgent. Below is a short list of example reasons you might need a payday loan.

  • Flat tyre which needs replacing so that you can get to work
  • Boiler breakdown in the middle of winter
  • A season train ticket for a new job, where you haven’t received your first paycheck yet

When should you not use a payday loan?

As a standard rule of thumb, if you don’t need to make a payment immediately, then you don’t need a payday loan. Things like holidays, birthday presents, and days out aren’t really sensible reasons to apply for any sort of credit. It sounds harsh but it’s true. There is no justification for getting into debt unnecessarily, and where possible you should always try to budget in advance and think about any upcoming payments before they are due, so you’re not left short of cash in the final few days before payday. Sometimes people apply for credit as a ‘just in case’ measure, but if you’re not sure you will use the funds, then don’t apply just yet as you’ll still be required to pay interest on the money borrowed.

Alternative Types of Credit to Payday Loans

For a while, payday loans were one of the only options for people with a bad credit history to borrow money. You can search for alternatives to payday loans online and you’ll see a wealth of results in your search engine – just be mindful that not every option will be a direct alternative.

Being aware of the different credit options available to you is always good, whether it’s a payday loan, credit line or just an overdraft facility, and often it only takes a few minutes of research online. But credit being accessible is not the same as credit being necessary. Whatever type of credit you’re thinking of applying for, you should only borrow money when you really need to because missed repayments can make credit harder to obtain in the future.