Pay day loans
A website that's willing to lend you the cash you need straight away. Sounds too good to be true? It probably is. Beware of the pay day loan.
So you’re broke? Massively broke. Broke as in you’re eating sausages and bean mix from a tin and could make an actual fort out of your red bills? And then an advert pops on your laptop, or you pass a shop in town, offering you that precious money until more cash comes in.
Three words. PLEASE. BE. CAREFUL. Why? Here’s why.
What are pay day loans?
Also coined ‘short term cash loans’, pay day loan companies offer you wads of money on a short-term basis, often to tide you over until you’re paid or your student loan comes in. The catch? They charge a huge amount of interest – we’re talking over 1,000% – for the convenience. Even if you pay the loan back straight away, you’ll pay back significantly more than you borrowed.
Changes to pay day loans
Clampdowns on pay day loans are now in force to make them fairer to customers. Under the new regulations, short-term pay day loans:
* Can’t charge you more than twice the original debt. So, if you borrow ?100, you won’t have to pay back more than ?200,
* Can’t charge more than ?15 in fees if you don’t pay back your loan on time,
* Can’t charge more than 0.8% interest per day.
While these changes are obviously very welcome, we still recommend you avoid pay day loan companies if you possibly can.
Why should I avoid getting a pay day loan?
“Pay day loans are a step up from the loan shark,” says Yvonne Goodwin, an independent financial advisor. “Before the financial crisis hit around 2007, it was pretty easy to get a low-interest bank loan or a credit card, but now it’s much more difficult. Now, these pay day loan websites have sprung up everywhere to fill the gap – they’re a symptom of the times. But the concern is they prey on vulnerable people.”
Though loan companies are clear about their interest rates, the way they entice people in has been criticised. If you’re in a desperate spot money-wise, phrases like “?400 INTO YOUR ACCOUNT WITHIN 20 MINUTES” or “YOU’RE ONLY SIX MINUTES AWAY FROM A DECISION” can seem tempting.
And if I can’t avoid it?
Then remember this: such easy money makes it simple to forget those massively high interest rates. If you didn’t have much cash to start with, where are you going to find this extra money?
If you don’t pay the loan back fast, the high interest could bleed you dry quickly. You may even be tempted to get another pay day loan from a different company to pay this one off, increasing your debt.
“The danger is missing a repayment and then having to pay interest on the interest on the interest,” says Yvonne. “And if you can’t pay, you can wreck your credit rating, or default, which means you won’t be able to get a mortgage in the future.”
Can a pay day loan wreck my credit rating?
Payday loans are logged on your credit score. So if you pay them back promptly then theoretically they shouldn’t affect your credit rating. If you don’t pay back quickly, they’re a quick way to damage your score.
According to MoneySavingExpert.com, there’s a possibility that banks will soon differentiate between pay day loans and other types of loan, seeing pay days loans as a red flag showing you’re in financial problems. This could make it harder to get a loan or mortgage.
But I’m so skint. Where else can I get the cash?
If you’re able to, the wisest choice is to ask your family for help.
“I really would recommend the Bank of Mum and Dad as the most viable alternative,” says Yvonne. “Not only will borrowing from them protect your credit rating, but they’ll no doubt nag you into sorting out your budgeting issues so this doesn’t happen again.”
If family isn’t an option, and you’re on benefits, it may be worth asking your local job centre about getting a crisis loan. You’ll have to pay them back, usually by having a small amount deducted each month from your benefit, but they’re interest free.
It’s also worth ringing debt help lines as they’ll be able to discuss alternatives with you. The CCCS debt website is worth checking out, as well as your local Citizens’ Advice Bureau. And – when the panic is over -it may be worth checking out budgeting advice to prevent this happening again.
Photo of payday loans by Shutterstock
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Updated on 29-Sep-2015
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