Payday loans have been in and out of the media spotlight consistently over the last year or so, receiving intense criticism regarding the marketing campaigns, collection practices and high interest rates.
'Predatory' 'legal loan sharks' and 'exploitative' are just some of the terms that have been used to describe the way in which payday loan lenders operate. Amongst all this criticism it still seems that more and more people are turning to this short term finance every month.
While many have had positive experiences from using payday loans it seems that a large percentage are actually experiencing further financial trouble as a result of taking out these loans, and at face value it is easy to see why.
Payday loan lenders generally offer between £20 and £500 which is designed to be repaid at the borrowers next payday. The interest rates range from 2000% to 5000% which generally means you'll be paying between £75 and £125 in interest on a £400 loan borrowed over the full 30 day term; seems reasonable right?
The problem lies when the borrower is unable to repay the total amount at the agreed payment date; interest mounts at a rate of 1% per day, allowing the payment to rollover for 60 days would mean you are paying an additional £300 on top of your initial repayment figure. It is also highly likely that you'll be charged a late payment fee of around £30 meaning that your £400 loan could eventually cost more than double!
The way the interest mounts has attracted a lot of attention from various organisations, who are urging payday loan lenders to carry out some form of affordability check on the applicant. Despite this, the checks involved in the payday loan process are few and far between meaning the approval rates are relatively high.
Often the reason that someone would fall into a spiral of payday debt is because they have initially borrowed the money for the wrong reasons such as covering household bills or paying off small store card debts. This has posed the question; what should payday loans be used for?
Payday loans are designed to offer small amounts of short term cash to tide borrowers over until the next payday- this is the only thing they should ever be used for. So this simply means you borrow the money to cover day to day expenses like food and transport.
If you need small amounts of cash to cover expenses like household bills or consolidating credit card debt then a more suitable option may be something like an instalment or guarantor loan.
