The Perils of Payday Loans

The adverts promise a solution to your financial worries, with the money in your account by the time your favourite show has returned from the break. Payday loans offer easy money so in the current economic climate it is no surprise to hear that the number of people using this service is on the rise.

However, payday loans are fraught with danger. With APR in the region of 2000% they are often cited as ‘a last resort.’ Yet this is not true. If your financial situation is that severe the last thing you need is a payday loan as things could get much worse very quickly.

How a Payday Loan Works

Payday loans are designed to bridge a gap before you get paid, hence their name. You can generally borrow between £10 – £1500, depending on the lender. This is expected to be paid back in full, including interest, after one month. Even if you manage this it will still not be cheap. The usual rate of lending is around 30% per month. So if you borrow £100 you will have to pay £130 back. Although it is not cheap, if you know for definite you will be able to pay it off it may be possible to use a payday loan without getting into too much difficulty. If, on the other hand, you default on the repayment it could be catastrophic.

Failure to Repay a Payday Loan

If you have a payday loan and fail to pay it back within the allotted time the cost will spiral. For being only a day late you will be charged a penalty of between £15-£30. Then for every day that passes the debt mounts as the interests charges rise and you incur further charges for any letters that are sent chasing the debt. One cautionary tale is of a lender that borrowed £75 but failed to repay after one month. The added charges meant they could not afford to pay it after two months and so the debt spiralled in this way. After six months, borrowing £75 had left a debt of £3,000 that they would never be able to repay. Being only a few days late can set in motion a chain of events leaving you with an unpayable debt. Essentially, the representative APR can fast become a reality. Failure to meet a repayment, no pun intended, should be avoided at all costs.

Chasing the Debt and ‘Skimming Your Card’

Lenders can be very aggressive chasing a debt. Not only may they charge you for letters they send but they can often use a technique called ‘skimming.’ This means they will try to take money from your debit account up to three times a day until they find an amount low enough that it is accepted. This is paid off against your debt and can happen multiple times. You usually allow this by agreeing to the terms and conditions before you receive the loan so it is perfectly legal. The lender will also put a bad mark against your credit rating making it difficult for you to obtain credit in the future.

The Appeal of the Payday Loan

Payday loans still appeal though because you can get money fast and there are minimal requirements to be eligible. If you are over 18 and in employment usually your application will be accepted. These sites play on vulnerability by making it so simple to get a hold of quick cash. It is simple – simply dangerous.

Before taking a payday loan explore all the alternatives. Bank loans, asking for an advance on your wages, overdraft or even borrowing from friends can be better than taking a high-risk payday loan.

Taking a payday loan may seem like the answer but in reality, it could lead to looking for another ‘last resort’ to the bigger problems they have caused.

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