Managing your finances can be difficult. For some people, it may require taking out credit from time to time to maintain a balanced cashflow. While it’s up to you to decide how you spend borrowed funds, there are certain types of credit which are better suited to particular circumstances. For example, you wouldn’t use a bank loan to pay for a season train ticket to work. However, a bank loan would be a reasonable way to finance a kitchen renovation. There is a range of different uses for each type of credit. In this short guide, we’re going to focus on whether it’s sensible to use a payday loan to buy a car.
A payday loan is a quick way to borrow money without a guarantor. Usually, you can apply online and if approved, the funds are transferred to your bank account within minutes. Payday loans are quick, easy, and quite accessible as you don’t need a high credit score to get one.
Payday loans can be a financial helping hand. Especially if you need cash quickly to cover an unexpected payment for which you’ve not had time to budget. Payday loans have a high interest rate. This is why they’re not designed to supplement your income or to be used as a frequent borrowing option. If you need regular assistance managing your finances, you’re probably better off using a revolving form of credit. Such as an arranged overdraft. Ultimately though, you should probably review your budget and spending habits. This is advisable if you find yourself frequently depending on credit to meet your regular monthly payments.
We haven’t noted ‘car purchase’ in the list above because a payday loan is not the most sensible way of financing a car. Firstly, you can usually only borrow up to £1000 with a payday loan. This might be enough to cover the cost of a car repair. However it’s not usually enough to buy a car and so you might end up borrowing from somewhere else as well. While you might be financially savvy enough to have multiple debts on the go at once, ideally you should always aim to have as few credit streams as possible.
Payday loans also have a high interest rate. This is largely because you borrow over a short period of time – usually 3 or 6 months. Instead of borrowing now to repay over 6 months, it would be better to save up a little each month and try to buy the car outright with the money you’ve saved. Not only will it be cheaper as you won’t have to repay any interest, but you also won’t have to worry about meeting additional monthly payments, making money management less stressful.
Payday loans are great for accessing cash quickly to cover emergency expenses. However, buying a car is seldom an emergency and often something you think about for a while before you even begin to look. Therefore, when you start to consider replacing a vehicle, you should re-budget to increase your savings first, then look at the different car finance options.