Conventional loans – harder to apply for, less people approved, higher interest – why don’t we ditch them?

Everyone has needs with financial emergencies cropping up at some time or the other. At times it becomes a challenge to meet these sudden expenses with the money we have in hand and other alternatives need to be resorted to.

Screen Shot 2014-07-21 at 9.54.22 PMThe perils of conventional loans

There is of course the option of going for a conventional loan from a bank, but the process is less attractive now than ever before. It is long drawn out with plenty of paper work and documentation.

This makes it inappropriate, especially when the need is immediate. Approval rates are also low. Even those with higher salaries need a little help every now and again with a conventional loan; utility bills are on the rise, and gaining mortgage approval is definitely more difficult this year – so many have to pay higher rent charges instead of owning their own home. It seems our purse strings are getting tighter, and financial credit is needed now more than ever.

The reason we’re needing these loans

Financial emergencies can arise from a variety of reasons as is seen in a survey carried out by the SA leg of the Wonga brand which found that close to 45% of customers used their loans to cover unexpected costs due to essential items, utility bills, tuition fees, medical expenses etc. This trend is noticed across the UK, with most having to pay off debts and not having money saved aside for such contingencies.

So, what does one do when such a situation arises? The only alternative is to depend on family or friends to bail them out which is not always feasible especially with the rise in cost of living. Even if some have savings set aside towards mortgage repayments or college fees, it is not appropriate to use this money to tide over a sudden emergency.

Another reason conventional loans aren’t working…

Another disadvantage for those who do have attractive credit scores is that they stand less of a chance of getting a loan. In such situations for those who do not have any funds saved and need to make immediate cash payments, the answer is payday or short term loans. For short term relief they are ideal because of their simplicity, convenience and speed in being processed. They also serve as a mode of help for those who do not have an additional source of income.

The actual process

Short term or payday loans as they are more popularly known, are easy to obtain and as the name suggests, are meant to be repaid when the borrower receives his salary.

The biggest plus point is that the lending company does not need to collect a stack of documents from the customer which helps to reduce the processing time phenomenally. The primary criteria is being employed, having a bank account number, address and mobile number.

The loan can be processed from 5 minutes to within an hour of applying and generally is transferred into the bank account of the borrower. This gives the borrower almost instant access to the funds and even though the amounts are generally small ranging from £100-400 they go a long way in an emergency.

These loans prove to be an asset when an individual needs quick money to make a payment without having the hassle of running from pillar to post to get assistance. The main thing for the borrower is to ensure that he repays the amount due within the scheduled period.

Things to consider

Although this financial service is innovative and beneficial for those who make use of it, care needs to be taken in certain areas to avoid being duped in any way. Yes, they might be better than conventional loans, but any kind of loan needs serious consideration.

The most essential rule is only to deal with those companies that are certified and registered with the competent financial authorities and are established names in the business. Also the company must be upfront in all its charges which include rate of interest, annual APR and terms and conditions. If any company does not offer a clear picture of its financial transactions, it is better to look elsewhere for a transparent and reliable company. In case there is the possibility of not being able to pay on the agreed date of repayment, make it a point to get in touch with the company at the earliest so that they might be able to extend the date of payment. Any good company will always be transparent and flexible in its dealings with its customers.

The most important factor to remember is that payday loans are meant to help out only in times of a financial crisis and should not be resorted to spend on non-essentials.

Author bio: A financial adviser, this author has been working in the short term financing business for several years. Recently, she has begun to help payday borrowers with their financial difficulties and helping them to improve their spending habits.

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