The Payday Loan Trap
Ever thought about taking a payday loan? I advise against taking a payday loan and I explain my reasons below. I give advice about alternatives to taking out a payday loan.
Payday loan adverts: Bombarded and Bored by Adverts
Picture from Danilo Rizzuti |
If you have ever wasted your time watching daytime TV you will notice a trend in the types of adverts in between shows. They tend to be some lawyers telling you how to claim for any accident or injury, some other lawyers telling you how to claim back PPI (payment protection insurance), and finally some woman with a fixed smile telling you how the payday loan that she just took out was the solution to all her problems. I just wanted to wipe that smile off her face, and here's why...
What is a Payday Loan?
A payday loan is a loan that a company issues you that are extremely short term loans. They are short term in the sense that you can apply and within 15 to 60 minutes could have the money in your bank account. They are also short term in the sense that the money is to be repaid from anywhere between 1 to 30 days. The loans tend to be anything between £1 to £1000. It's called a payday loan because people take it out to help tie over their finances until the next paycheck comes in. What's the catch? Well about 1500% to as much as 4000% APR (Annual Percentage Rate).
What's Wrong with a Payday Loan?
For one particularly well known site I put in some specifications to see how much it would all cost me. I said that I wanted to borrow £100 and pay it back in 30 days. They told me that the total amount to repay in interest plus fees was £136.72. A 37% increase from the amount I had borrowed. That is a staggering amount to pay back for only a months borrowing.
Interestingly, payday loans are targeted towards (obviously) people who struggle to keep up with bill payments, or overspend on credit cards, or can't keep up with payments. Ironically these are the very same people who can clearly least afford to pay these high levels of interest. Furthermore, the people who can afford to pay these sorts of rates, don't need these types of loans, qualify for more reasonable rates at banks, or for credit cards, or are plain sensible enough to steer clear.
Those who struggle to pay for bills will struggle to pay for a payday loan and so they will rack up more debt. Their problems will build rapidly in an upwards cycle.
If it hasn't already, it should become clear to you by now:
If you're thinking of taking a payday loan...DON'T!
But if I Shouldn't Take a Payday Loan, What Should I do?
- Firstly don't take a payday loan
- You need to deal with your debt in a sensible way. Seek help if needs be. For more advice, read my article on Destroying Debt
- If you can, borrow from a bank at a proper rate and pay off slowly
- If you don't qualify for a loan from the bank then do anything but take out a payday loan: borrow from friends or family, sell things, cut your expenses
- Just do anything but take out a payday loan, even if it required eating beans on toast every meal for the next few days because taking out that loan may mean that next month you won't be eating anything at all
- There are emergency loan services provided by the government called crisis loans. You qualify if you're struggling with any payments. The benefit of these loans are that you don't pay any interest on them
What are your thoughts on payday loans? Surely there can't be anyone out there that actually thinks that they're a good idea?
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