The real dangers of payday loans

A payday loan is a short term, high interest loan (often around 4,000% APR), sometimes called a cash advance, which lenders provide borrowers, to be repaid at their next payday.

Some companies require some proof of employment or regular income, such as a bank statement, but increasingly more and more are not asking for such proof. Often no credit check is carried out, so the company has no idea whether you can realistically afford to pay this money back.

And what is this 4,000% APR? APR stands for Annual Percentage Rate - the amount of interest you will pay back on your short-term loan on the course of a year. To put it simply, if you borrowed £1 for one year at 4,000% APR you would end up paying back £4,000. Borrow £1,000 and the figure becomes £400,000.

The worrying thing is that online payday loan companies have made the process of applying for a loan quick, easy, and most importantly, attractive. You can apply for a loan in minutes, even from your smartphone. Some companies have even taken advantage of the fears students have over tuition fee hikes and have set up pages directed explicitly at undergraduates - causing them to quickly come under fire from the NUS.

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Advertising for payday loans saturates our experiences of television, social media, and radio. Advertisements are everywhere, and the small detail of extremely high interest rates is rarely advertised explicitly. In fact it often appears at the bottom of the screen in a small font, and almost clear colouring.

If a person borrows £400 for a month, they will run up around £140 in interest and fees, and £540 will be taken out of their bank account automatically the next month. But of course, if someone is already struggling to make ends meet, this extra cost is not going to help circumstances. It often becomes a never ending cycle of getting payday loans to pay off the existing ones.

These types of loans have been widely criticised for taking advantage of the poor, and exploiting financial hardship to make a profit. Pressure group Compass called it “immoral and legal loan sharking” and in 2010 started a campaign for a cap on interest rates in the ‘high cost credit sector’.

The industry defends the costs of payday loans, arguing that interest rates are proportionate to the costs and the nature of the short term loan. They also claim that for the small proportion of customers who do fall behind with repayments, companies are usually happy to work with those customers to work out the best course of action.

The best advice is to steer clear of these kinds of loans entirely, particularly if you in a lower income bracket - of which the majority of students are. They are expensive. It might only seem like £200, but with the high interest rates and the automatic pay back the following month there is no way a payday loan company will help to aleviate your financial difficulties. It is more than likely that you will end up in an even more dire situation than before. So, take TNS's advice: avoid like the plague.

The real dangers of payday loans

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