If you've ever found yourself short of cash and waiting on your next paycheque, you may have been tempted by one of the many companies offering payday loans. But are they worth the risk?
A payday loan is a loan taken out to cover expenses until your next payday, hence the name. The companies offering them often tout their service as being quick and easy, creating the image of an ideal way to get an advance on your wages, while carefully drawing attention away from the potential pitfalls and risks involved in such a transaction.
A payday loan allows you to borrow a certain sum and then pay it back, with a specific fee added on, when you get paid. The fee takes the form of interest, and as such the amount increases the more money you borrow. Of course, the other major disadvantage is that it adds up over time, too.
The payday loan companies like to insist that this is not a problem - after all, you're only borrowing the money for a week or so, until you get paid. But for a good number of unfortunate borrowers, the situation unfolds in a different and far less pleasant way.
Many people who end up in the scenario where they desperately need money don't think too extensively about the future, figuring they can cross that bridge when they come to it. But when you set aside a chunk of your next paycheque to pay off your loan, you're likely to be left short again at the end of the month - thus leading to what is often referred to as the "payday loan trap" or the "payday loan cycle".
The payday loan trap arises when you end up dependent on these sorts of loans to be able to pay your way. You might, for example, start off by borrowing £200 to keep you covered until you get paid. When payday comes, you can expect to pay £50 on top of that in interest - so you're £250 down before the month has even begun.
If your expenses are reasonably consistent, that means that before long you will find yourself £250 short for the month - and chances are that going back to the payday loan company will seem to be the only option. But the £250 loan you need this time around increases to over £300 when you add interest - which leaves you with even less cash the following month. It may sound ridiculous, but a great many people's finances end up trapped in a constant downward spiral due to payday loans.
Of course, this almost inevitably leads to the eventual situation where the amount owed to your lender exceeds your monthly wage, and you have to ask to defer your repayment. This is when the high interest rate kicks in - with a typical rate in excess of 2000% APR, a £200 loan would accumulate over £4000 in interest over the course of a year. From this you can see how many people end up in dire financial straits merely for needing to borrow a little spare cash.
You may be asking how you can avoid this, or whether a payday loan is ever worth the risk. The payday loan companies claim that responsible borrowers simply use their services in emergencies - rather than using them to cover everyday expenses, they say, people come to them when an unexpected problem comes up, such as unforeseen car repairs or a high quarterly bill.
It's true that if you're certain you will be able to pay it back, a payday loan can help out when you need some extra money for a one-off expenditure. The problem is that you still pay a hefty sum for the privilege, even if you do make the repayment on time - and the trouble with unexpected expenses is that you never know when another one is going to come up.
And, despite the protests by payday loan companies, studies have indicated that their average customer will make eleven such transactions a year - far from the one-off emergency lending image that these firms would like to encourage.
So, if it's best to avoid these companies, what are the alternatives, and what can you do if you've racked up a vast debt with them already?
If you're short on cash and looking for the best way to temporarily borrow some money, an authorised overdraft from your bank may be a better route than payday loans. Some banks do charge excessively so it is best to look into the specifics beforehand, but this may be a less risky means of making ends meet.
If you are looking to pay bills or rent, it is always worth asking the relevant person or company about making a late payment. Many people find themselves in such situations and, in a lot of cases, there will be procedures set up to deal with this kind of thing. It's a far better approach to try this than to get yourself into debt which you cannot afford to settle.
A similar option is to ask your employer for an advance on your wages. In some situations this may not be possible, but it is worth asking and even if you are left a little short the following month, you won't have to worry about paying back any interest. And there is always the option of borrowing from friends or family, as embarrassing as it may be.
But what if you've already fallen victim to predatory lending by a payday loan company, and are now having trouble affording the repayments? There are certain steps you can take to deal with this, by making a claim that the loan was sold to you unfairly.
Anyone offering such loans is required under law to ensure that you have a thorough understanding of the exact nature of the agreement you will be entering into. If they failed to disclose any aspects of the loan you ended up taking out, you may have grounds to invalidate the contract.
For example, if the website from which you secured the loan did not clearly display the APR offered, then your loan may have been mis-sold to you and could be unenforceable. Likewise, if they did not explain the complete terms and conditions to you while you were applying or after you had done so, then they are at fault for this. Things such as APR, setup fees, the amount of the loan and your payment schedule should have all been clearly laid out to you.
If you feel that they failed in any of the above procedures, then the first thing you should do is register a complaint with them. They may have a specific complaints procedure on their website for you to follow, or it may simply involve writing them a letter. You'll need to state that you want your loan cancelled as it was not explained to you properly, resulting in you agreeing to something that you would have otherwise not accepted.
If this initial complaint is rejected or ignored, then you will need to contact them again - this time directing your correspondence to a manager. Restate your complaint and include any previous communication between you and the company.
If, even after this, they do not resolve the problems to your satisfaction, you can take your case to the Financial Ombudsman Service (FOS). The FOS is an independent adjudicator dealing with disputes between individuals and financial firms. They offer their assistance free of charge, and if your case is successful then the loan company will be legally obliged to obey your wishes with regard to the loan.
If you do not feel that you have a case for getting your loan cancelled, and your finances are particularly bad, it may help to get in touch with the Consumer Credit Counselling Service (CCCS). They offer free advice and help to those having problems with debt, and could arrange a payment plan for you which would enable you to pay off your loan in manageable chunks.
It is best not to get involved in the risky world of payday loans, but if you are already facing a hefty debt, there are ways out of the trap.
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