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Payday loans were originally an American phenomenon that grew in popularity, the more US consumers descended into debt. Since the credit crunch started to sinks its teeth into consumers this side of the Atlantic, payday loans have mushroomed in popularity. More...
Popularity doesn’t always equate with credibility however, and payday loans represent an extremely risky and costly way of borrowing.
A payday loan is when a consumer borrows money on a short-term basis, or like the name suggests, until payday. Payday loans are particularly popular among people with poor credit scores who are ineligible for bank or building society lending. Economic conditions are such today that gaining credit is becoming increasingly difficult, but payday loans give many people access to money that would otherwise be out of reach.
Payday loans are in effect cash advances on a monthly salary. Once the borrower has been paid at the end of the month the lender is repaid either by postdated cheque or debit card.
Almost anyone can qualify for a payday loan so long as they are over 18-years-old, have a full time job and a bank account.
Payday loans are truly the last resort when it comes to borrowing money. An increasing amount of lenders are offering payday loans with APR* (annual percentage rates) as high as 1,355. Almost all of them are making their money from people with chronic debt problems.
Lenders typically charge £25 for every £100 borrowed, which means a loan of £500 would cost £625 to repay.
Payday loans are attractive for two main reasons; firstly they give people with bad credit a chance to borrow money and secondly, up to £750 can be deposited into a bank account within hours of receiving an application.
However, failure to make a repayment on time can have a crippling effect. A missed repayment would typically incur an additional £25 charge for every £100 borrowed. An interest fee of this kind would equate to £31.25 (£25 per £100 of a £125 debt). Failure to clear any of the loan for six months would equate to £400. Further calculation shows that non-payment over the course of a year would cost the borrower £1,400.
* The APR figure is something of a red herring because the loan is offered on a monthly, not annual basis, so if one monthly payment is missed, the APR could increase.
The number of payday loan providers has increased dramatically in recent times and is set to continue. Current providers of payday loans are:
Payday loans are designed for short-term borrowing when people find themselves in emergency situations. Payday loans should only be used when absolutely necessary and ought never be viewed as an overdraft alternative. If you are considering a payday loan, Debts.org advises you only borrow what you can afford to repay at the end of the month, or whenever you receive your salary. Use them only as a last resort.
Citizens Advice Bureau says payday loans are the number-one issue their advisers deal with. The charity reports a sharp increase in people seeking help who have fallen behind with mortgage repayments, or who are struggling to pay utility bills and council tax.
Frances Walker of debt charity the Consumer Credit Counselling Service (CCCS) says her organisation is starting to see more clients who have taken out payday loans.
“The people who use payday advance lenders are those for whom all other options are severely limited,” says Ms Walker. “They are less likely to have a partner’s income to fall back on, or to be able to obtain a loan against property. Being younger, they are also less likely to have had an opportunity to build up a positive credit history, which will make it difficult for them to obtain standard credit cards or loans.”
Few assets and low income? Find out if debt relief orders can help you reduce or cut debt.
