The Rundown: Payday Loans – Will They Work for You?
If you’re stressed out about money – and let’s face it, who isn’t? – borrowing a small sum of money for a short amount of time can seem like the perfect answer.
A payday loan is more or less self-explanatory. You borrow some cash and pay the full chunk back on your next payday. But, what isn’t quite as clear is what’s involved.
If you’re tempted, here’re a few things to think about.
- Payday loans are usually granted incredibly quickly – sometimes within 10 minutes – with little paperwork and without any credit checks. These are the reasons so many people resort to them.
- They’re short-term, high interest. Payday lenders must publish their APR – annual percentage rate. This is the interest rate you’d be charged if you took the loan out over a whole year. 5,000% is not unusual.
- Fail to repay your loan and you’ll owe the outstanding balance, plus interest, plus fees and charges, from the lender. This can quickly turn into a nightmare cycle of rolling debt which can be difficult to escape. It’s estimated 30% of people don’t pay back on time.
- It’s not uncommon for some unscrupulous lenders to resort to intimidating methods to get their cash back. The Office of Fair Trading has reports of people being harassed at work – sometimes up to 16 times a day – by lenders demanding money. That’s hardly likely to help your stress levels.
- Most payday lenders get access to your bank account, collecting repayments from your debit card. Known as Continuous Payment Authorities (CPAs), it means they can take repayments without checking with you first.
- Your bank must cancel any CPAs on your account if you ask them to. Just tell your bank the name of your lender. If the bank makes any payments after you’ve cancelled, they must repay these to you.
If you are going to get a payday loan:
- Make sure you can pay it back when you need to. Do the sums before you get the loan and make sure you can budget for the repayment. If there’s any doubt, don’t consider it. No matter how big your problems are now, they’ll be even worse with a high-interest debt you can’t repay.
- Look before you loan. There are a considerable number of payday lenders out there, some more reliable than others. Go with the lender who makes it perfectly clear what the total cost of your loan will be over the time you’re going to borrow it.
Payday loans are not a long-term solution to financial difficulty. They might help you out of a tight spot, but if you’re struggling with debt problems, they’re not the answer. They could even make your cash crisis worse.
Other lenders, such as banks, building societies or credit unions might be able to help by spreading out the payments. Credit unions offer loans to those seeking small amounts or with lower credit scores. Or maybe see if friends or family could help you through a tricky time by letting you pay them back in instalments?