Payday loans have had their fair share of bad press, with an abundance of horror stories emerging about the destructive effects this type of credit can have on people’s lives. To confuse the public further, these stories are sharply contrasted with the way that payday loan companies market themselves – as a helping hand, a friend giving in your time on need, complete with adverts featuring singing oranges and cute dogs. So the question remains: what is the truth about payday loans? Will they help or hinder your finances?
What are payday loan companies?
Payday loan companies, as the name implies, provide short-term loans designed for use between paydays. Typically, amounts from £100 to £1000 are loaned, usually to meet emergencies or unexpected costs.
What do I need to know about payday loans?
Sky-high interest rates
Often with eye-watering APRs of 1000%+, taking a payday loan often results in you, the customer, repaying up to double what was originally borrowed.
Lenders gain access to your bank account
CPAs (continuous payment authorities) allow lenders to collect a payment directly from your bank account – without seeking your permission first. However, you have the right to cancel any CPAs on your debit card.
Make sure that you can repay
We cannot stress this enough – DO NOT take out a payday loan if you have any doubt or uncertainty as to whether you can repay it, as the consequences could be disastrous.
You may be pestered
In the event of defaulting on a payment, the lender will want to contact you in order to find out what the issue is.
There are alternatives
Remember that payday loans aren’t the only option – there are a range of other lenders such as banks, building societies and credit unions that may be able to help you.
|Credit Unions||Payday lenders|
|· Not-for-profit||· For profit|
|· Provide low interest rates||· Eye-watering interest rates|
|· Encourage members to save||· Encourage customers to borrow more|
|· Flexible – we don’t add on charges if you want to repay a loan early, or need to extend the loan agreement||· Inflexible – extending a loan term will often result in extra charges plus interest|
|· Interest capped at 3% per month (42.6% APR)||· Interest capped at double the amount borrowed|
|· Provide free, built-in loan insurance||· Appear not to offer loan insurance|
How do payday loans compare to credit unions?
If I do go to a payday loan company, which one should it be?
The truth is, payday loan companies are so weakly regulated that it would be nearly impossible to compile a list of the best ones – however, when checking them out do your homework and make sure that they:
- Are registered with the FCA (Financial Conduct Authority)
- Are signed up to the Good Practice Charter (visit http://cfa-uk.co.uk/wp-content/uploads/2017/08/PDSTL_Charter.pdf for more information)
- Carry out credit checks
So, what is the answer? Are they friends or foes?
That is for you to decide. Based on the facts, we would strongly discourage anyone from going to a payday loan company, but at the end of the day it is everybody’s personal decision. Loans could be compared to fire – when used correctly, they can be very useful, but when used incorrectly they can cause damage. It is up to you, as the customer, to manage your finances.