What you need to watch for with short term and payday loans
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If you're short of cash during the year, especially at the end of each term, you might be tempted to take out a payday loan. Access to quick cash might sound like an easy way to tide you over, but this type of borrowing can turn out very expensive. Here's what you need to know.
How payday loans workThese loans are only meant to be for a few days, perhaps a month at most, though they can be for longer. Often they're used by people who don't have access to other types of borrowing. If you apply and are accepted for a payday or short-term loan, money is transferred to your bank account. As with any loan you'll be charged interest on the money you borrow - and these can be pretty high. On your repayment date all the money you've borrowed and the interest due will be taken direct from your bank account.
What paydays loans costThe longer you borrow for, the more you are charged in interest and fees. Even though fees and charges have been capped, they can still be incredibly expensive. For every £100 you borrow for 30 days, the most you can be charged if you pay back on time is £24 - so 24%. If you miss your repayment (known as defaulting) you will be charged a maximum of £15 plus further interest on the money you borrowed. The maximum you will pay back is twice the amount you borrowed, including any interest and charges.
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Reasons not to get a payday loanAdvertisers might tempt you to get a loan for any number of the reasons, or you might just really want a night out and think you can manage to repayments. Don't ever consider a payday loan if any of the following ring true:
- You want the money to pay off another loan
- You've already got one or more payday loans
- You don't know exactly how you'll pay it all back
Help if you're struggling with payday loans or other debtsIf you think you'll struggle with paying back a payday loan, don't ignore it - contact the loan provider straight away. By law they need to give you reasonable time to repay the loan, which might include freezing interest and charges. They might also consider smaller instalments if paying them back in full means you can't pay for rent, bills and food. Whatever your situation, if you are struggling, the lender must refer you to free debt advice. You can also find someone to talk to about your debts via the Money Advice Service website. https://www.moneyadviceservice.org.uk/en/tools/debt-advice-locator This article is provided by the Money Advice Service. All information accurate as of date of publication.
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