You may have noticed an increase in advertising from payday loan companies. They offer consumers something that seems like a viable short term solution to their financial worries. While on the face of it a loan like this might seem like a good idea, financial watchdogs such as Which? are warning that payday loan companies are leading their customers into a downward debt spiral which can be almost impossible to get out of.
With no credit check, practically anyone can get their hands on up to £1000 which they pay back on their next payday or within 30 days. It is often suggested as an answer to an unexpected bill or expense that there aren`t sufficient funds to cover at the time. Promises that credit will be approved and the funds deposited into an account within a short space of time, often as little as an hour, are upheld by the company. The problem comes when it is time to pay the money back.
Reports show that the majority of people who take out a payday loan are actually using it as a last resort to their existing debt problems. According to Which? over 60% of borrowers are using this type of loan for essentials such as groceries, nappies or to put petrol in the car to get to work. This means that when it comes to paying it back, there are rarely sufficient funds to cover even the initial amount borrowed, let alone the astronomical interest that is part of the package.
Payday loan companies make a lot of their money from their high interest rates, which can be higher than 2000%apr. This means that a loan for just £500 can cost an extra £150 in interest. That`s almost £5 for every day of the loan period.
The problems aren`t just with the amount of interest. For many, the fact that the only reason they have taken out such a loan is the fact that they simply do not have the money to start with, is a fundamental problem. This means that at least 45% of people end up rolling over their loans at the end of the initial lending period, with extra charges being made for every single letter or reminder that is sent out.
The very nature of the lending agreement means that if the company decides they want their money back now, they are able to empty your bank account of the full amount, leaving nothing for essentials such as food and paying the rent. It is a vicious, but entirely legal, cycle and it is causing untold stress for thousands of borrowers.
The reality is that many payday loan companies don`t actually want their customers to pay back their loan on that first pay day. Some consumers have ended up with up to 9 or 10 payday loans from various different companies, all of which are accruing interest and charges at an alarming rate.
Payday loan companies make their money from creating a cycle of debt that is almost impossible to get out of. They lend money with the full knowledge that the majority of people will not be able to pay it back when it is due and the costs can spiral upwards of several thousands of pounds from the initial borrowing of a small sum.
Alternatives to taking out a Payday Loan
No matter how desperate your financial situation may seem, taking out a payday loan is not the answer. Even if you have bad credit you may be able to take out a loan or credit card to consolidate your debts. Simplyfinance.co.uk will enable you to calculate your repayments in advance so can create a budget which will allow you to get out of the debt cycle. Alternatively, speak to Humber Debt Solutions to see how an alternative Debt Solution could help.