The Problem Of Payday Loan Debt
Payday loans are an increasingly popular way of borrowing a small amount of money for a short period of time, to cover the often-encountered gap between running out of cash and receiving your next wage or salary.
There's no doubt that they fulfill this function well, being quick to arrange and easy to be approved for, usually needing only a suitable bank account and of course an upcoming payday on which date repayment will be automatically made. There is, however, a pretty major drawback to this form of finance: it's expensive. Very expensive.
Flat Fee, Huge APR
A typical fee for a payday advance loan is around 15-20% of the amount borrowed - so if your loan was for £100, you'd usually pay back something around £120. This sounds reasonable enough, if not exactly cheap, but when the APR (Annual Percentage Rate) of these loans is worked out, it's usually eye-wateringly large, with more than 1000% far from uncommon. This is partly because the APR is intended to measure the amount charged over the course of a year, which for a payday loan would involve 12 sets of fees - obviously very expensive.
Loan Renewal - Beware
This is not surprisingly a less than useful way of getting long term credit, and while payday loans are only designed for short term borrowing, a lot of people fall into the trap of renewing their loan on a monthly basis, and therefore paying a new fee every time. This is a fast route into serious debt problems for many people, as the constant drain on an already stretched budget leads to other bills going unpaid.
What to Do?
Obviously it's better not to get into this situation, but if you do, is there a way out? If possible, you should try and get another form of credit to clear your debts which allows repayment at a lower rate. Given that many people only take out a payday loan after being refused elsewhere, this might not be possible.
If you are stuck with using payday loans, at least try and wean yourself off them by reducing the amount you borrow systematically each month, which should be much easier to do than trying to simply cut out the loan in one go.
In any case, the need for a regular payday loan is a strong sign of a broken budget, and trying to to rebalance your spending against your income should be a goal for the medium to longer term.
All information is for a general readership and doesn't constitute financial advice.
Consult with a qualified independent advisor for personalised debt help and advice.
