Payday loans work on the assumption that you desperately need to borrow a small amount of money that you will pay back on your next pay day. They will also use that desperation against you – charging large fees and offering huge interest rates.
While it is sometimes necessary to take drastic steps when trying to stay afloat financially, payday loans should be your last resort when looking to borrow money.
If you are considering taking out a payday loan then you need to know as much as possible about how they work and what will happen once you take one out. Here are some things to keep in mind.
They usually have incredibly high interest rates
Payday loans will always have very high interest rates, meaning that if you don’t repay the money quickly you can end up paying back a huge amount of interest. In fact, payday loans often cost more in interest in a single month what a credit card would in a year. Sometimes there isn’t an interest rate all at, but rather a fixed fee – so no matter how quickly you are able to pay it back you will end up paying far more than you would with a loan or credit card.
You risk destroying your credit rating
Payday loans are dangerous not only because they could throw you into a permanent cycle of debt, but also because they can ruin your credit rating. Even if you manage to pay the loan back on time you could be damaging your ability to get a mortgage. Lenders look at your previous borrowing to predict your behaviour, and many will see using a payday loan as a sign that you are a risky person to lend to.
You must be 100% certain that you can repay the loan within a month
Payday loans prey on people who can’t afford to repay them immediately. Only paying back the interest each month could potentially result in you eventually owing thousands of pounds, even if your initial loan was as low as £100.
There are always other options
If you are desperate for a loan but have been turned away elsewhere you could try a credit card specifically designed for people with poor credit. We would also suggest you seek out debt counselling help from a non-profit agency who will take you through the various options available to you.
Don’t become a regular customer
Using payday loans regularly is a strong indicator that you have a serious problem with your finances – one that using a payday loan will not rectify. Try creating a personal budget to ensure you are not over-spending each month.
Payday loan companies will also repeatedly try and regain your business after you take one out by offering larger and larger loans. Don’t be fooled – the deals are never good and will probably be just as difficult to pay back, if not more so.
If you are struggling with card repayments, you could check your eligibility for a balance transfer card. Balance transfer cards allow you to move a balance from a credit card onto another card which charges no interest for a certain period. If you are confident you can pay the balance off before the 0% introductory period ends, you can save money and get your finances back on track.