Amid economic uncertainty, the rising cost of living and wages that aren’t keeping up with the pace, it can be difficult to make your pay stretch far enough each month. Add to that an unexpected expense, like a car or boiler breakdown, and it becomes almost impossible.
It’s on those occasions that people might need a little extra cash. People can be tempted to turn to payday loans to make ends meet. But is a payday loan right for you?
Payday loans are widely used in the UK and overall borrowing comes to a staggering £1.2 billion. The loans are meant to be used by people who are earning a regular wage and who can repay the loan by their next payday.
The average amount borrowed is £270, which might not seem like a lot, but given that you can expect to pay as much as £25 back on a loan of £100, you can see that they are not a cheap way to borrow.
Payday loans usually have a much higher rate of interest than personal loans (one lender was charging 1000% interest until restrictions were put in place!). The trade-off is that you can usually get approved for a loan the same day you apply and the loan is not secured on your assets. This might make it seem like a more attractive proposition than borrowing from the bank.
Make sure you borrow from a reputable lender
It’s a good idea to use a comparison site on-line when searching for a reputable payday loans company. In the UK, the payday loans companies on comparison sites are regulated by the Financial Services Authority. This means that they must be transparent about the fees they charge and the interest rate plus the terms and conditions of each loan they offer.
Don’t be tempted to let debt spiral
Many lenders such as Loan 2 Pay day will allow you to ‘roll over’ your repayment a few times if you find that you can’t make repayments within the originally agreed time. But interest and fees will continue to mount up and you will just end up owing more. A short-term loan then becomes a noose around your neck.
Currently, there is no cap on how many times a lender will allow you to ‘roll over’ the debt which can have bad implications for your ability to repay the loan if you get into financial difficulty. This year, though, the Financial Conduct Authority introduced a cap on charges for defaulting on a payment and a cap on daily interest that could be charged.
If you miss a payment, you will be charged a maximum of £15 where previously you could be charged as much as £30.
Only borrow what you can afford
It’s tempting to think of a payday loan as an ‘easy’ option when you need quick cash. But regardless of where the loan comes from, you should only borrow what you can truly afford to pay back. Otherwise, you risk becoming dependent on payday loans and using them as a very expensive way to bridge the gap between paychecks.