Being declined for a loan can be a frustrating experience. However, if you’ve recently been declined for a payday loan, you’re not alone. As the FCA (Financial Conduct Authority) continues to tighten restrictions on who can access short-term finance, many applicants who were once eligible for emergency same day loans now find themselves being turned away by the lenders they once relied on.
But where do you turn when you’ve been declined for a loan? In this article, we’ll look at the next steps for declined applicants, how to access payday loans, avoiding loan sharks and why missing payments on bills is a bad idea.
I’ve Been Declined for a Loan – What Next?
Finance companies are increasingly having to decline applicants deemed as “high risk”. These applicants usually have poor credit scores or a history of missed or failed repayments. While the FCA may deem this judgement as a means of protecting vulnerable people who are already in debt, it’s worth considering whether the rejection of previously successful loan applicants is fair. After all, when a person needs fast access to finance, it’s likely that they’re going to have to get it from somewhere – so what are the alternatives?
Bad Credit Payday Loans
Payday loans are a great alternative to mainstream finance for those with less than perfect credit scores. However, payday lenders are becoming increasingly more reluctant to lend to high-risk consumers. This means that the criteria used by many payday lenders to ascertain whether an applicant should be accepted or not has tightened.
The FCA estimates that nearly 90% of borrowers should still be able to access payday loans, even with less than perfect credit scores. In addition to this, FCA regulations mean that borrowers of payday loans now pay far less than ever before in interest fees. However, one in ten previous payday loan users may now find themselves unable to access their preferred form of credit and may seek alternative loans for poor credit.
The FCA’s reason for tightening the restrictions for payday loan applicants is altruistic – on paper, at least. The authority claims that payday loans would worsen the situation for the 10% of borrowers now excluded from accessing emergency finance. Of course, in theory, they’d be better off without a loan – but how are these people expected to manage without a loan when life’s little financial emergencies crop up from time to time?
Turning to Loan Sharks
When the FCA decided to regulate the payday loans industry further, one of its biggest concerns was that applicants’ declined credit would be driven to illegal measures to access finance. This could include applying for loans with “loan sharks”.
A loan shark is an illegal lender who usually charges extortionate fees and responds to missed or late payments with threats of violence towards the borrower or their family. When you borrow from a loan shark, there is no safety net in place – a small loan of just £200 could eventually land you in thousands of pounds worth of debt, with nowhere to turn for advice, and nobody to complain to.
The term “loan shark” derives from the fact that these unscrupulous lenders often prey on people who are highly unlikely to be able to afford the terms of repayment on their loan. The idea is to illegally trap the borrower into a cycle of debt, where the loan shark continuously profits from repeat payments and intimidates the borrower into continuing to pay. The consequences of turning to a loan shark can be severe, resulting in poor mental health and even physical attacks on the borrower if they refuse to pay or cannot do so.
Neglecting to Pay Bills
People who have been declined for a payday loan might be unwilling or unable to borrow money from other sources and will have to “do without”. In many cases, this means neglecting to pay utility bills, mobile phone contracts, broadband costs or monthly subscriptions to other services. Avoiding several payments in one month can hugely negatively impact an individual’s credit score, which can take years of careful money management to repair.
Not being able to access finance pushes some people to cover bills or one-off costs by going into an unauthorised overdraft. The consequences of this can be severe, given that many of the high street banks charge up to £10 a day in unauthorised overdraft fees. Over the course of a month, these fees can be exorbitant compared to the interest on a payday loan. The FCA states that for each £100 borrowed from a payday lender, an individual will only be expected to pay back £24 in interest over a month – a much more preferable sum than those charged by the high street banks.
Some declined payday loan applicants decide to sell possessions to raise money to tide them over until their next wage comes in. While this isn’t always a negative thing (after all, many of us have unwanted items lying around the house), the prospect of selling a prized item or possessions with sentimental value (such as a piece of jewellery, heirloom, medal or a musical instrument) can be much more traumatic than simply repaying the interest on an emergency loan.
Borrowing From Friends or Family
While borrowing from loved ones can cause embarrassment, it’s usually a good option for those who can take it. In most cases, friends and family are unlikely to charge interest, but if you neglect to repay them, it could put a strain on your relationship. It’s also worth pointing out that not everybody is in a position to borrow from wealthier friends and family, especially during times of economic downturn.
Using Existing Savings
If you’ve already got money saved, using a little for an unexpected financial emergency is undoubtedly the best move you can make. You won’t risk damaging your credit rating by being turned down for a payday loan, and you won’t be expected to pay interest – although the terms of your savings account might dictate that you are penalised for making a withdrawal. Ultimately, if you’ve got the money to deal with a financial emergency, you should avoid taking out loans where possible.
Cutting Back on Spending
If you can make cutbacks to your current outgoings to deal with a temporary financial issue, you’re demonstrating that you can be financially responsible. This is a great response to being declined for a payday loan, as it shows that you have the determination to improve your financial health. You may find that if you can make cutbacks during emergencies, you might be able to make them at other times, too – and this could provide you with additional funds to pay off outstanding bills or money owed. By following this path, you’ll eventually restore your credit rating and improve your access to finance in the future.
Accessing Debt Advice
Approximately one in five people who are declined for a payday loan say that they have eventually sought debt advice. This is the response that the FCA had hoped for, as it means high-risk applicants are more likely to start taking control of their finances. To do this, many need to discuss their finances with an expert, who can assess their situation and provide them with a list of options, including debt consolidation, voluntary insolvency or a debt order which can help to reduce the amount of overall debt owed by an individual.
Are Declined Payday Loan Applicants Likely to Be in Worse Debt?
It’s a common misconception to suggest that an individual who is declined for a payday loan is in worse debt than those who are accepted. On the contrary, figures suggest that declined applicants are usually in an increasing spiral of debt when applying for a loan. Still, this figure did not accelerate further after their application was declined. On the contrary, in many cases, the debt levels of declined applicants stayed the same or even slowed after being declined.
Ultimately, this begs the question: was being declined for a payday loan beneficial for the applicant? The applicants themselves seem to think so. According to research undertaken by the FCA, over 60% of applicants agreed that being turned down for a payday loan was “in their best interests”.
The reasons for this remain unclear, however. In some instances, it could be because applicants were forced to look elsewhere and found cheaper forms of credit. In other instances, applicants may have been forced to take control of their finances or perhaps realised they would not have been able to afford the loan’s repayment terms in the first instance.
Has the Interest Cap Affected Payday Loan Applications?
It appears that the FCA cap on APR rates for payday loans has caused more applicants to be declined than ever before. For many lenders, the low returns on short-term payday loans are deemed insufficient compared to the high level of risk they pose by lending to those with exceptionally poor credit ratings.
However, an increase in potential borrowers being turned away does not necessarily have a negative impact on those deemed high-risk. On the contrary, in many cases, being declined can positively impact high-risk, poor-credit borrowers, as it causes them to reassess their current financial situation.
Payday Loans: Are They Still the Most Flexible Form of Borrowing?
While it can be disheartening to be declined for a payday loan when you need rapid access to cash, it could be a sign that you should consider improving your current financial circumstances. For example, if you’re consistently finding yourself short of cash towards the end of the month, creating a budget, cutting back on your existing spending or taking extra hours at work/applying for a second job are all ways in which you could create extra money without having to resort to loans.
By doing so, you could put yourself in a position to pay back existing outstanding debts, improve your credit rating and increase your chances of access to finance in the form of payday loans, emergency loans, credit cards, overdrafts and store credit in the future.
Even though one in ten people find themselves being declined for payday loans, payday lenders are still some of the most flexible in the UK when it comes to obtaining short-term finance. Here are just a handful of reasons why you should consider applying for a payday loan, even if you have bad credit:
1) Easy application process
When you apply for a payday loan, the entire process is done online. It’s possible to apply in a matter of minutes, and if your application is successful, you could receive funds within an hour. For most people, applying for a short-term loan involves simply completing a web form with their personal/financial information.
2) You can get the best deal with a payday loan broker
Why bother trawling around the internet for the best payday loan rates when you can use a free broker service to do the hard work for you? We’re here to help match you with the best direct lenders in the UK. When you fill in our form, we’ll liaise with FCA-approved lenders to find you the best possible deal for your circumstances. We won’t perform a “hard” credit search that stays on your file, either. If you apply with multiple direct lenders over a short period, this can have a detrimental effect on your ability to obtain credit, as it demonstrates to potential lenders that you are desperate for access to finance. When you use a broker, you won’t encounter this issue until you’re ready to accept the terms of a direct lender, who will then perform a hard credit search before issuing your loan.
3) Payday loans are easily manageable
Payday loans put you in control of your repayments. For example, many lenders will allow you to make early repayments via your own personal online account, which means you could pay less in interest if you repay sooner than you agreed.
Apply for a Payday Loan Today
If you need fast access to finance, use our free payday loan service to find the best deal available for you. It’s as simple as filling out a form and allowing us to match you with a lender.