Payday loans have become a major part of life in Britain in recent years and for many families, using them is the only way they feel they can get through to the end of the month.
But using them can be very dangerous and it is not unheard of for customers who took out relatively small loans to end up owing tens of thousands of pounds. This is because they take out payday loans they can not repay, leading to a vicious circle of debt that builds up over time.
Payday loans are one of the most accessible forms of borrowing money and they are widely available, both on the high street and via the internet. Individuals with poor credit ratings are typically still able to get a payday loan and even if they are turned down by the first provider they approach for money, they are likely to be able to borrow money from another company.
The main issue with payday loans is the extraordinarily high rates of interest charged. As the money is only intended to be borrowed for a few days, hence the name payday loans, the rates are large and can run to as high as 7,000 per cent.
What to consider
There are various things to think about before taking out a payday loan. Firstly, consider whether this is the best way to borrow money. It is best to address debt issues at their root cause wherever possible. People who are overspending should go through their bank statements to identify where they are spending more money than they have coming in.
Once it is clear where cash is being frittered away, it is much easier to get a grip of a financial situation and avoid getting into a position where a payday loan feels like the only way out.
For people who have decided payday loans are the answer to their issues, it is critical to ensure the money is repaid within the timeframe agreed with the company. If the money is not paid back on time, this is where the massive interest rates really start to cause issues and debt rockets.
Before taking out a loan
Individuals who have decided to take out a payday loan must make sure they are fully aware of the agreement they are entering into. They should read the small print of any loan offer very carefully and ensure they completely understand the repayment plan and any associated charges they would be liable to if they were unable to pay back the money on time.
Payday loan providers ought to explain the features of the loan, such as the repayment schedule, in plain English that is easy to comprehend. Companies are also legally obliged to warn people taking out payday loans that signing up to this type of debt can lead to serious money problems.
The vicious circle
Payday loans are a dangerous method of borrowing as the levels of debt can rise extremely quickly and begin to get out of control fast. Those who do not pay back the money they have borrowed on time will find they have to fork out for late payment charges, while their debt will soon spiral unless they can clear the amount.
This is where people can get into serious financial difficulties, as many will turn to further payday loans to clear their initial debts, leading to ever larger sums owed to companies. Once an individual is trapped in this vicious circle of debt it can feel as if there is no way out, but this is not necessarily the case.
When payday loans and associated debts start to mount up, people need to identify how they can clear the money owed as quickly as possible. Taking out a low interest loan from a bank is worth considering for those in this position, or consolidating the debt into one monthly payment.
Whatever method is used to clear the payday loan debt, it's vital to get rid of it as soon as possible, as the charges soon rise to levels that are prohibitive to the average household.