Like airplane life jackets, payday loans should be something you hope you’ll never have to use.
We give you five reasons why they are best avoided except in the case of a dire financial emergency:
1. Astronomical Interest Rates
Payday loans are one-off, short term loans designed to tide you over until your next payday, but the interest rates they charge are nothing short of astronomical.
Don’t be fooled by companies who only quote what a loan will cost you in pounds and pennies. Take out a typical payday loan and you could find yourself being charged at a rate of anything between 1,600 % and 2,700%. All the more shocking when you consider that personal loans from your average high street lender are available for as little as 9% APR.
2. Spiraling Debt
Just as payday loans are quick and easy to take out, they’re also very easy to defer. Most lenders will happily allow you to roll your borrowing over from one month to the next. However, fail to pay off your payday loan in one go and you are running the serious risk of your debt spiraling out of control.
You will continue to accumulate interest at an astronomical rate for each subsequent month that you allow your loan to rollover. Within a matter of months you could find that you have ended up paying more than the original amount you borrowed in interest alone.
Have a think about how long your monthly wages will be able to cope with such outgoings and how you will afford to pay it back in the long run.
3. Incurring bank charges
Your interest payments are usually taken out of your bank account on a date agreed between yourself and the loan company – typically on or after payday. If your debt spirals and the interest payments continue to be taken out of your account each month, you could also find yourself incurring bank charges if you exceed your agreed overdraft limit.
4. Drinking in the Last Chance Saloon
If you are in the position where you are considering a payday loan then it is often a good indicator that your are already living well beyond your means. If that is the case, then is it really a good idea to be saddling yourself with even more debt?
Equally, if bad debt has already pushed you into the arms of payday loans, then by taking one out you will only be making things worse. Once you are trapped with a loan that is costing you a small fortune in interest, where else is there to go to get yourself out of debt?
Perhaps you would be better off talking to the Citizens Advice Bureau about how best to tackle your debts rather than taking out a payday loan.
If you do find yourself struggling with a debt it is always better to discuss the problem with your lender. Simply ignoring your debt problems could result in you defaulting on your payments and incurring serious penalties.
5. Risk of fraud
The payday loans market has exploded into life in a relatively short amount of time – about as long as it took for the worst recession in nearly 80 years to bite-home, funnily enough. Unfortunately, wherever there is the ‘ching-ching’ of money being made, it is never long before the fraudsters turn up.
When you take out a payday loan you will be giving up highly confidential information, such as your address, date of birth and bank details. You wouldn’t give out those kind of details to a stranger in a pub, yet there are some online payday loan companies who do not even provide basic contact details.
If this is the case then you have little chance of establishing whether they are a legitimate company or just a front for stealing your personal details and selling them into the hands of criminals.
If, and only if, you have exhausted all other possible avenues of raising finance then our payday loans comparison table could at least help you find a competitive rate of interest.
