Think of payday loans and flashy TV adverts and brightly coloured websites quickly come to mind. Promises of quick cash fixes with little or no hassle are made, with thousands of people across the country turning to this type of loan when the going gets tough.
However, despite the slick marketing surrounding payday loans they have long been considered to be controversial.
Often coming with high-interest rates, high late payment charges and short repayment schedules the reality is that the quick fix promised by payday loan companies actually have long-lasting effects on people’s finances.
People can find themselves reliant on payday loans as they attempt to keep up with repayments, creating a vicious cycle of financial distress.
What is a payday loan?
Quite simply a payday loan is a short-term loan used to provide immediate financial relief for those in need. The idea behind the loan is that is should be repaid before you get your next wage.
However, this advertised convenience and ease comes with a cost.
Payday loans typically come with high-interest rates and often exceptionally high APRs.
You should never take a payday loan unless you know you will be able to repay the loan in full and on time.
How does a payday loan work?
A payday loan does what it says on the tin.
It is a loan designed to help if you’re struggling with your finances from one payday to the next.
Cash is paid directly into your bank account and you are expected to repay what you owe in full – along with interest and additional charges – at the end of the month.
Despite often being used for borrowing small amounts over a short period of time, these loans come with big price tags attached and should always be approached with caution.
Taking on a payday loan could make your situation worse and lead your finances into turmoil should you be unable to pay on time and in full.
How much does a payday loan cost?
The cost of payday loans is capped by a law implemented by the Financial Conduct Authority (FCA). This means that payday loan companies are now no longer able to charge exceptionally high fees and prevents you from repaying more than twice what you borrowed in the first place.
If you take out a loan for 30 days you will not pay more than £24 in fees and charges per £100 borrowed.
The cap also applies to repayment charges, meaning the most you can be charged in default fees is £15 plus interest on the amount borrowed.
Why do people use payday loans?
No one likes to admit that they’re strapped for cash, however, sometimes life takes unexpected twists and turns that can cause havoc with our finances.
Unexpected life events tend to be the reason that people turn to payday loans in a bid to get through the month. Whether it’s because a relationship has broken down or the boiler has broken down on the coldest night of the year, payday loans have been a financial crutch for thousands of people across the country.
However, for some people payday loans can become a method of getting by day-to-day as they attempt to repay a range of other debts.
If you find yourself in this situation then you should seek help with your debts.
What are the risks of payday loans?
There are a number of risks that it is important you be aware of before considering a payday loan.
- High-interest rates: Payday loan companies are renowned for charging as high an interest rate as they possibly can. Failure to make payments on time can also trigger additional charges and fees – making an already difficult repayment plan even harder.
- Short repayment: As the name suggests, you are more often than not expect to repay your loan on your next payday. It isn’t always easy to meet the deadlines set by payday loan companies and falling behind on payments can be easier than you may think.
- Direct bank account access: When you apply for a payday loan you often will be asked to give the company access to your bank account for payments. However, many people find themselves having additional funds taken from their bank account – often hidden in the small print of the loan – to cover the cost of ‘fees’. Your bank accounts may also be shared with a number of different companies who might also attempt to take hidden fees from your account also.
If you’re struggling with payday loan debt and are looking for advice, talk to TAD – our resident debt expert – for free and confidential advice.