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Payday loans: Beware!

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Payday loans are being thrust at us continuously and the continued rise in living costs combined with stagnating salaries means many families are finding it harder and harder to make ends meet each month. As a result, increasing numbers are turning to short term, high interest loans after exhausting the more traditional lines of credit. A recent report by consumer watchdog Which? found that one million families are taking out payday loans every month as they struggle to pay their bills.

Just under half of those use them to pay for essential items such as food and fuel, while a quarter needs the money to service existing credit. Yet half of the people who take out payday loans find they just can’t cover the cost of repayments which often forces them to take out more credit and spiral further into debt. The issue of payday loans has been attracting a lot of media and political attention recently, with Ministers being urged to tackle the problem.

What is a payday loan?

Payday loans are supposedly short-term loans designed to offer smaller amounts of money – usually between £50 and £800 – which is typically to be paid off over one or two months. They can provide a much-needed source of cash for people who have an unexpected cost to meet, but it is a very expensive way to borrow. Companies which provide payday loans sell themselves on the fact that they can give you the cash quickly and easily – even if you have poor credit history. The money is usually paid straight into your bank account, often within minutes of your application being approved.

You will often be given up to a month to pay the money back, plus a lot of interest. Some lenders let you choose the repayment period. The repayment, plus interest, is then taken straight from your bank account.

What do they cost?

According to the Money Advice Service, the average payday lender charges £25 in interest for every £100 borrowed, assuming you pay it back within 28 days. This amounts to an APR of 1,737 per cent – a credit card in comparison would charge around £1.50 with an APR of 18 per cent. However, if you don’t pay the money back on time the fees and interest will soon start to add up and there may be late payment fees on top.

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What to be aware of

Payday loans may be easy to get and if you have problems paying the money back you might be offered an extension, known as a deferral or rollover. However, the Money Advice Service warns that this is a scenario that can quickly spiral out of control. Payday loans are only manageable if you genuinely do pay the money back within 30 days. By extending it you will end up with more debt, more interest and probably more fees. You may then be tempted to get another payday loan from a different company to pay the first lender and this can lead to debts that mount up very quickly.

If you can’t afford to repay your loan, the lender should freeze charges and interest no later than 60 days after your last payment, but any missed payments can have a major effect on both your credit rating and future ability to borrow.

There are several problems with payday loans.Payday loans: Beware!

These include:

  • Disproportionate charges: Borrowers face disproportionately large leaps in the amount they pay for small changes in repayment amounts and timings. For example, a late payment fee of £20 would almost double the total cost of a £100 loan from most payday lenders.
  • Lack of transparency: Borrowers who do not repay on time often end up paying a lot more than the headline interest charge as a result of the various fees and charges.
  • Rollovers: Which? believes there should be a limit as to how many times payday loans can be rolled over, or deferred.
  • Unsolicited increases: Consumers should not be encouraged to take on additional borrowing, for example by being offered an increased credit limit which they didn’t request.

If you have a problem with a licensed payday loan company, you should complain to the company in the first instance. If this does not provide a satisfactory outcome, you can complain to the Financial Ombudsman Service. Free help and advice is also available from a variety of debt advice charities which can help you negotiate with your creditors without you having to resort to more borrowing.

 

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