The Dangers of Payday Loans
With most countries still feeling the effects of the global credit crunch and an on going recession, cutting down the size of national debts has become the number one concern all around the world. Because of this new economic reality, many people and many families are also seeing extensive cuts to their own incomes and their monthly household budgets and are also realising that it is time for them to pay back the money they might have borrowed when times were good. However, at the same time as most people are drawing in their belts and trying to reduce their debts they are also seeing a reduction in the amount of money coming in from their weekly pay packet and the amount of assistance coming from their governments too. When you factor in the increasing prices at the pump and in the supermarket it is clear that for the moment things are a lot tougher for a lot of people. This clearly makes it more difficult to clear those outstanding debts. But it is essential that people don’t get themselves into worse debt when they are trying to do this and do not take out silly loans with high interest rates and excessive charges if they are struggling with short term cash problems. One such type of loan that is often open to abuse and should be approached very, very carefully is a payday loan.
Numerous people get drawn into using payday loans and occasionally they can be useful, if managed well and used for a good reason with a reputable company. However, this is rare. With many companies charging interest rates over 2000% APR Payday Loans are still an option of last resort and must only be used when no other line of credit is available at short tem notice and when you are certain they can be paid back. The whole point of Payday Loans is that they let people borrow a small sum of cash for a very short period, between a week and a month, and the loan must be paid back by the end of that month. In return, the loan company will make a large profit by charging far higher interest rates than any normal loan.
Most kinds of payday loan will let you borrow any amount between £50 and £1500 and ask you to pay it back within a month. The loan company will usually charge you something like £30 on each and every £100 you borrow from them for each and every month that you borrow it. This might not sound so bad, until you work out that a rate like that would be an incredible 2,255% APR over a year. This is why payday loans are only intended to be for short-term use and for getting a small amount of cash in an emergency when you can’t get a loan from your bank or anywhere else. As long as you are certain that you can pay back both the interest and the principle amount within that month (and that the loan is not larger than your monthly pay check) and as long as you use one of the few reputable payday loan companies, then you should be ok. But if you were to get behind with the loan you would quickly see your outstanding debt spiral out of control.
Lastly, make sure you have exhausted every alternative first. Check there is no room left on your credit card for a small cash advance or phone and talk to your bank to arrange an overdraft or to extend your current overdraft. Payday loans are useful when well researched and managed but if possible it is best to avoid them altogether.
Alex is a journalist and blogger. He currently writes about the loans sector and everything from niche mortgages to payday loans.
