Payday loans have become increasingly common in the UK, and elsewhere, in the last few years. Particularly since the financial crisis of 2008, the number of people accessing these short-term loans has risen dramatically. Indeed, it is estimated that in the tax year running from 2011 to 2012, more than 8 million payday loans were taken out.
What are payday loans?
Payday loans are short-term loans of cash, typically of a relatively small amount of cash that do not require the same type of credit checks that larger loans need. Payday lenders are not required to check an applicant’s credit history. Such loans get their name as they are often used to pay bills and other outgoings at the end of the month before an individual’s next pay day arrives. They are available from high street shops and, more frequently, from internet sites. Payday loans are easy to access and the money is available quickly – some lenders will transfer the cash within 15 minutes of applying.
A largely unregulated area of the economy, payday lenders are renowned for the high interest rates they charge. Some lenders charge over 1000 percent.
Another area of contention is the disproportionate charges that can apply to a loan. For instance, high charges for late payment are a major cause of concern, as they are added to the debt and so increase the amount of interest to be paid. These and other charges are often hidden in the small print of the loan agreement. Customers may assume they are paying an advertised rate of interest but ‘hidden; charges can increase it substantially.
Debt problems arise when borrowers get behind on their repayments. Typically, if a customer does not repay their loan according to the terms of the loan agreement, the lender will roll the loan over onto another one (for instance, repackage the loan as a new, month-long agreement). However, this usually entails a fee, which is added to the debt, and a higher interest rate, making the new loan harder to pay off than the original.
Some customers take out a payday loan with another lender to pay back the first. This often leads to multiple loans and a chronic situation where the customer sinks further into debt while accruing extra fees and more interest repayments. If you are struggling with debt, contact an experienced debt advisor who will be able to help with where you stand legally and provide options for sorting out your problems. If you just require short term assistance to get over a particular issue then there are a number of simple options for this such as a debt management plan or debt consolidation loan. If however your problem is more serious you may have to get IVA debt advice or even advice on bankruptcy which are more formal debt solutions.
Seek advice early
The important aspect when you have a debt problem is to take action on it to get it sorted and not to be wary about asking for help. There are many debt advice organisations who can advise you on exactly what an IVA is for example and ensure you have the information to make the right decisions. You will generally find them helpful and considerate.
Payday loans can be a useful means of securing finance. However, customers should take care to fully understand the terms of the loan and ensure they have the funds to repay it in time. Individuals may also wish to explore other avenues of short-term funding, such as a loan from a credit union, and overdraft at a bank or, in times of great need, a loan from the government Social Fund. If you do decide to get a payday loan, shop around to find the best deal and be aware of the consequences of failing to repay the loan.