Most of us will know what it's like to run out of money before pay day is in sight. We all lose sight of our spending once in a while; sometimes it's unavoidable – the bills all come in at once. Whatever the reason, it sure is a worry.
There's a plethora of companies on the market these days that are ready to extend a quick-fix helping hand to those that find themselves short of a few quid mid-month. With 'payday loans', people are able to borrow anything up to £1,200 for small periods of time, usually from a few days to a month or so. They are advertised as quick and easy solutions to cash flow woes, with lightning quick applications, instant decisions and the money transferred into the applicant's bank account within hours, at any time of the day, on any day of the week. But the caveat is exorbitant – and some might say extortionate – costs.
The typical representative APR – the interest rate that is not lower than the lender expects at least 51 per cent of its customers will pay – sits at around 1700% with most payday loan providers. At this rate, borrow £300 for one month and you'll pay back around £375, in one repayment, on the date that you agree with the lender. And that's without any admin fees that the company might charge. It's a shocking amount to pay back over such a short period of time. To put this into perspective, the average rate of interest with regular loans sits somewhere around the seven per cent mark.
What else can I do?
Before you resort to taking a payday loan, see if any of these other avenues are open to you:
- Can you arrange an overdraft on your bank account or up the level on your existing one? Overdrafts tend to charge around 15-20% interest per year, meaning the monthly interest on that £300 loan would work out at somewhere in the region of a fiver.
- Could you use a credit card? As long as you pay the amount you borrow back within your monthly billing period you usually won't incur any interest rate charges at all with this method. Bear in mind, though, that there are charges attached to cash advances if you need cold, hard money.
- See if any organisation that you owe money to is willing to wait for their payment – even if you incur a charge for paying late it might well be less than the amount you'll pay back in interest with a pay day loan.
- It might be worth looking into whether you could consolidate any debts you have into more easily manageable payments.
- Look at whether your work or neighbourhood has a credit union in place. This is where people with a common bond join together to receive better borrowing deals.
Remember:
Increasing your borrowing levels through other means could add to any debt problems you are experiencing if you are not disciplined. Try to bring your limits down to the levels you are comfortable with at the earliest opportunity. And with any financial activity you undertake, including payday loans and all of the options above, your credit rating could be affected, for better or for worse.
When there's no other way
They might be expensive but pay day loans could be a god-send for you if they are your only option for getting yourself out of a hole. To be eligible you'll need to be 18 years old or over, be resident in the UK, have a UK bank account and have a steady income which is more than the amount you want to borrow. Whether or not your credit rating comes into play or not is dependent on the individual lender.
If you have to take out a payday loan:
- Only borrow exactly what you need, but bear in mind that you can usually only have one at a time. Consider your situation carefully.
- Think about what the repayment will mean for your next month's cash flow. You don't want to get into a situation where you have to bridge the gap every month with an expensive loan.
- It may sound obvious, but shop around for the lowest rate of interest. It's funny what money troubles can do to our perceptions. Don't turn a blind eye to the rates and snap up the first option you find just because it offers you a quick and easy fix. When interest rates are as high as they are with pay day loans, any difference could be significant for your back pocket.
- The lenders all say it themselves – payday loans should only ever be used as a short term solution and never as a long term borrowing option.
If you are experiencing problems with debt you can seek advice from the Consumer Credit Counselling Service on 0800 138 1111 or the National Debtline on 0808 808 4000.
Click here for further information on payday loans and compare what's on the market at Know Your Money.
Author: KYM Editor
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