Pay day loans

If you’re lacking in money, it can be easy to think that payday loans might be the quickest answer to get you out of financial trouble. If you’ve been unable to go out with your friends due to having no money, or you’re living on tins of beans to get by, that payday loan advert that pops up to offer you quick, easy money in your bank account within 24 hours can be very tempting. But here’s why you should avoid payday loans.

What are payday loans?

Sometimes called ‘short term cash loans’, payday loans offer you lots of money on a short-term basis. Most often they come with a huge amount of interest. Even if you pay the loan back straight away, you’ll pay back significantly more than you borrowed.

This is precisely why they should be avoided if you can. It may seem like the answer to your financial problems, but you’ll be in a more difficult position than before.

Limits to payday loans

Fortunately, there are some laws in place that stop payday loan companies being able to charge whatever they want. It doesn’t remove the risk of payday loans altogether, but it does mean that these companies are held accountable as lenders. Here are some limits to agreements with payday loans:

• Cap on total costs – this means that the lender cannot charge 100% more than the initial amount you’ve borrowed. For example if you borrow £100, the amount you repay is capped at £200.
• Default fees capped – if you miss a payment, you can’t be charged any more than £15 for that default.
• Initial cost cap – Before you even agree to your loan, your lender won’t be able to charge you more than 0.8% per day for the duration of the loan. This includes fees and interest.

The Financial Conduct Authority (FCA) is responsible for keeping payday loan companies in check, and enforced these rules in 2015. So while these rules are in place to make payday loans slightly safer, they should absolutely be avoided if you can.

Why should I avoid getting a payday loan?

“Payday 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. These payday 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.”

So while there are certain rules that they have to follow, the way that they tempt people to take out payday loans is very questionable. For example, it’s likely you’ve seen a TV advert that promises something like “£400 INTO YOUR ACCOUNT WITHIN 20 MINUTES”, which can be really tempting. It makes it look really easy. But often payday loans are a very short term fix for a bigger issue, and you can actually end up worse off.

Interest rates on payday loans

Easy money makes it simple to forget those massively high interest rates. If you’re feeling tempted by a payday loan, ask yourself: if you didn’t have much cash to start with, where are you going to find this extra money for the fees and interest?

If you don’t pay the loan back fast, the high interest could quickly get you into deep financial trouble. You may even be tempted to get another payday loan from a different company to pay this one off. This ultimately creates even more debt, and a cycle that’s difficult to get out of.

“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 payday loan ruin my credit score?

Payday loans are likely to impact your credit score, but theoretically if you are able to keep up with the repayments it won’t. However, as a lot of other companies use credit score to determine whether you’re a responsible borrower, they might view payday loans negatively.

They do use their own criteria alongside credit score to decide. So payday loans could potentially impact their decision when it comes other loans or finance products, for example.

Learn more about what to do if you owe people money

Alternatives to payday loans

While it’s likely that you’re in a bad financial situation if you’re considering a payday loan, try not to panic. There are alternatives out there that you should absolutely consider first:

Ask for a pay advance

Some employers might be willing to pay you all or part of your wages/salary earlier than scheduled if you’re in a tight spot. They’re not obliged to, so there’s a chance that they could say no. But there’s no harm in asking! It can be a lot of help, as it’ll just be taken out of your next paycheck.

Borrowing money from family and friends

If you’re able to (and you think they might be able to afford to), the wisest choice is to ask your family for help with money. Not only are they unlikely to chase you in the same way that loan companies do, there’s also not the risk that they’ll be charging you interest whilst you sort paying them back.

“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.”

Advances on benefits

If you’re on benefits, it may be worth looking at what emergency support you can apply for. Similarly to an advance from your employer, the money you borrow would simply be taken out of your next payment. This can be particularly helpful if you’ve applied for a new benefit, but need the money before your first payment is due.

Debt helplines

It’s also worth ringing debt help lines as they’ll be able to discuss alternatives with you. StepChange is a charity 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.