Beware the pain of payday loans
Monday, Sept 07, 2008
WHAT do you do if you are only a week away from payday but your current account is empty? The typical response is to use an agreed overdraft facility, or juggle bill payments with a credit card. But what happens if both are "maxed out"?
You don't have to be feckless or a spendthrift for it to happen to you: an unexpected bill or any emergency can hurt. If so, where do you go for help?
For increasing numbers of people, the answer to this short-term conundrum is a payday loan; but be warned, as the rates of interest that go with them can reach a staggering 10,000% APR.
Despite the extortionate charges, the numbers taking out payday loans has soared by 130% in the past year, according to Tim Moss, head of loans at the price comparison website. Money Supermarket.
Moss says: "Payday loans do seem to be plugging a gap in the market. Nowadays, even missing a single payment on your credit card bill or going over your agreed overdraft limit can not only be expensive in terms of financial penalties, it will also leave a black mark on your credit file.
"In that sense, a payday loan is not always a bad option. They can be useful if you need short-term credit, perhaps if there is a blip in your monthly budget."
In essence, a payday loan is a short-term cash advance, usually ranging between £80 and £800. The amount borrowed is repayable on your next payday. The maximum period of time you can take out a payday loan is 31 days, although in some cases it is possible to roll the debt over for another month.
Almost all payday loan companies operate on a fixed repayment structure: put simply, £25 is charged for every £100 you borrow. Some charge £30 per £100 borrowed. Using the common rate, if you borrow £100 you pay back £125. If you borrow £200 the total repayment will be £250, and so on.
This may not seem much. But over a term of 31 days it equates to a rate of interest of 1,286.1% APR. Ironically, if you were to pay back the loan sooner, the APR actually goes up, as the amount of interest is fixed.
Source:: scotlandonsunday.scotsman.com