Dangers of Payday Loans

Payday loans are featured in the news on a regular basis — often negatively. Many consumer groups warn against taking out this kind of loan unless it is absolutely necessary because of the often very high interest rates and fees that are generally associated with this type of financial product. A payday loan is exactly what it sounds like — a lender will advance an agreed amount of money on the understanding that you repay it in full as soon as you receive your next pay check, which is normally two weeks from the date the loan starts.

There is a fee for each loan which is high in relation to the length of time over which you are borrowing. This type of loan is often the last resort for people who are experiencing a short-term cash-flow problem and need to cover their essential living costs until they are next paid.

The main danger with taking out a payday loan is that you may quickly get trapped in a cycle of debt. Although a payday loan is normally for a fairly low sum of money, such as £200, it is easy to get trapped in a cycle of taking a new loan out every month to cover the same or increased shortfall. This problem is exacerbated should you take loans out from more than one lender.

To break this vicious circle, it is necessary to reign in any spending on non-essentials to an absolute minimum, which is easier said than done for many people struggling with debt. Drawing up a strict budget can help with this. Looking at other ways of getting the additional funds may be required, such as selling some possessions. Many people in this sort of situation will look at taking on a second job to break the negative cycle.

It is important to have a clear understanding of your income and outgoings for the month, as this can help to clarify where you could make a saving. A great way is to use an income and expenditure form listing your essential outgoings — these will include rent or mortgage, utilities, petrol if you drive and essential food. Any additional spending, such as broadband, and money for socialising, should be reined in until you are back on track. Put the saved money aside to pay off the amount owed, and continue to do so after the debt is settled so that you have a ‘rainy day’ fund should you find yourself struggling again in the future.

The more money saved, the better your position will be. You could also consider other forms of borrowing such as one of the secured loans offered on the market if you are committed to paying off as much as you can afford every month. Another option is to research debt consolidation loans — these allow you to pay off all your borrowing and then pay off the total debt over a longer period of time, which can be a good way of regaining control of your finances.

If you manage to build up a contingency fund, you will be covered in the instance of an unforeseen expense such as a car repair, broken boiler or any other situation that life throws at you. Many of the people that fall into a cycle of payday loans have a ‘head in the sand’ attitude to their finances and do not budget properly. Gaining control over your finances can be very empowering and is likely to save you a good deal of money in fees and high interest rates.

Considering other avenues with an aim to generating additional income will also help with your financial position, both in the short and long term. When you make a concerted effort to change your financial circumstances for the better, it can affect your lifestyle — fewer nights out, perhaps, or even something as simple as not buying a take-away coffee every day. But, ‘looking after the pennies’ as the old saying goes, really does add up to a significant saving over time, and making the right choices and trying to avoid taking out payday loans can make a big difference to your future financial standing.