Are Payday Loans a Long-Term Debt Solution?
Payday loans are strictly a short-term solution and should be treated as such. In the short term you might have a little peace of mind and keep your lenders at bay; however, if you continue doing this and building up a greater debt as a consequence your finances could become even more muddied. They work differently to traditional forms of borrowing. You will probably have seen headline interest rates in the region of 2,000%. Whilst this isn’t representative of the cost of short term loans (this is usually between 20-25%), the more you borrow and the longer you are dependent on this borrowing, the more debt you’ll create.
Let’s take a quick example. Say you’re looking to borrow £300 for a quick car repair. If you choose a payday loan company that is offering loans that are charged at £25 per £100 (equivalent to 25%) , then you will need to pay back £375 when your next payday rolls around. If you find that you’re in the same situation in the next month, then you might need to take out another loan to cover your costs or roll over your current agreement. If you’re borrowing another £375, your total repayment for the next month would then be £468. Your overall charges would therefore amount to £168.
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If this becomes a borrowing pattern rather than a one off loan, it can quickly plunge you into deeper debt and actually further your financial problems. Of course if you budget properly for the next month and know that you can pay the loan and all associated charges, it can be a way of preventing getting buried in bad debt. In some cases you might find that failing to pay standing orders will actually cost you significantly more than the interest on the average payday loan.
Failure to pay any kind of standing order can result in a whole plethora of costs. In the first instance you’ll often be charged around £20 for failure to pay a standing order. No doubt your bank account will then be overdrawn, leading to a further charge. This could equate to a standard bank charge (often around the £20 mark) or a daily fee for breeching your overdraft facility, both of which could cost you dearly. You might even find that the recipient of the troublesome Direct Debit may also charge you an adminstrative fee for failing to pay on time.
All of this can add up to a pretty sizeable figure. If you have multiple Direct Debits to pay, it can all multiply horribly leaving you well out of pocket and deeper in debt. Worse still, your credit rating could take a pounding, adding to what is already a bad situation. To avoid encountering a situation such as this it would often be advisable to actually take out an instan cash payday loans and avoid getting yourself into unnecessary difficulties.
However, if you are looking to use a payday loan as a way of securing your long-term financial future, you’d be well advised to think again. They might be a good way to get out of an unexpected financial fix, but certainly not as an alternative to a traditional loan.
