Are payday loans always a bad idea? Here's the good,bad & ugly.

By Natasha Culzac

You’ve got over two weeks until payday. All’s dandy except, your card has just been declined in Tesco.

You realise you’re totally out of money and have nobody to borrow from or perhaps there is, but god knows you won’t let them know that you’re skint. Do you get out a payday loan until the end of the month?  Controversial payday loans are never out of the news, it seems. For the unfamiliar, the set-up is that borrowers can take out fairly instant, fairly small, short-term loans with spectacularly high interest rates. You generally pay them back when you get your salary. So what’s all the fuss about?

The good

Emergency cash for the rent, a bill, or whatever life crisis there is - payday loan companies serve a purpose in that they can help you out of some sticky situations, fast. Getting the loan is pretty straightforward: you do an online application and can even get the money in your bank account the same day. It’s all perhaps a bit too easy!

You can borrow anything from £50 to around £2,000, even for those with poor credit history who would struggle to be approved elsewhere.  With some firms, if you pay your loan back early, you could even save money as you’ll only pay interest on the days you borrowed it. And if it turns out you need more dollar after taking out a loan, you may be able to top it up.

You don’t necessarily have to pay back the entire lump once payday swings around. For many payday firms, you can take out a loan and choose to pay it off over a few months or even a year...

The bad

… but the staggeringly high interest rates mean you could end up paying double the original amount you wanted to borrow. For example, says a £500 loan spread out over 10 months will cost a total of £1,000 by the time it’s paid off. That’s £500 in interest! 

Many loans, however, are only taken out for a couple of weeks or a month. Wonga has a representative example that says a £200 loan over 30 days will cost you £48 in interest, so you’d pay back a total of £248.

The interest rates are so high because of the risks involved. Someone needing short-term cash may be in difficult financial circumstances and they may not be able to pay it back. It’s not particularly helpful to look at the APR (Annual Percentage Rate) rates, which are so eye-watering, because APRs are worked out as if the loan was a year long. More information on the APRs of payday loans can be found here.

If you miss your repayment, not only could there be a fee (it depends on the lender), but you could have to pay additional interest on the outstanding balance for each day that you fail to pay it.

The ugly

Borrowers can be trapped in a vicious cycle of taking out further money to pay off a previous loan. Regular payday borrower Christopher Arnold told us: “I was once in the ‘spiral of doom’ for five months. Each month you just need to borrow more and it gets out of control.” 

Hey, even Google now considers payday loans a ‘dangerous product’ and have banned payday ads from the site!

Additionally, if you have multiple payday loans within 12 months, this can seriously negatively impact your credit score. Each payday loan is credit checked and the more of these checks you have on your file within a short space of time, the higher the eyebrows are raised.

Key Takeaway

Payday loans really should be the very last option for your emergency cash needs. They can help when all other avenues are closed, but you must ensure that you pay it back on time and don’t get sucked into a never-ending cycle of robbing Peter to pay Paul. Click here to find out what different types of loans are out there.

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