Money tip #125 – The dangers of Payday loans

3 min Read Published: 01 Mar 2011

Payday loans are short-term loans aimed at tiding you over until your next pay cheque while you are a bit short of money. The problem is that, as far as I am concerned, payday loans are simply a means of exploiting those people who are already struggling financially. Think of them like corporate loan sharks.

Interest rates of over 4000%

Which? Magazine recently published research showing that payday loan firms are charging interest at a rate of more than 4,000%! To say that this is outrageous is the understatement of the century. The problem is that these firms target those people who are financially desperate and are unable to borrow from mainstream institutions at reasonable rates. Which? highlight a typical loan offered by companies such as Wonga where a 28 day loan of £300 results in the borrower having to repay £390! This equates to an interest rate of 4,214%. Heaven forbid if you make a late payment as the penalties start piling up even more quickly.

The big problem with this type of short-term borrowing is that a number of online payday loan lenders are unlicensed to lend, something which the Office of Fair Trading is attempting to crack down on.

But what should the financially excluded do?

In my view payday loans can lead to a spiral of debt which can be impossible to escape. On the basis that the very people considering such loans are mainly those who can't get credit elsewhere and are already struggling with a debt burden I won't patronise them and say 'don't do it'. The fact that anyone considers this option proves how desperate their situation has already become. They are not taking out a payday loan because they want to. If they are then quite frankly they need their head examined.

So my advice is that if you are even thinking about taking out a pay day loan then before you do anything seek advice by contacting one of the many organisations offering free and independent debt advice. Not only will they help you, and not judge you, but they can help you see the light at the end of the tunnel before you make things a whole lot worse. Here is a link to a list of reputable independent debt advice agencies out there.

Image: kongsky / FreeDigitalPhotos.net

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