4 min read

The dangers of payday loans

Woman sitting down with hands on face after taking out a payday loan

It’s essential to understand the risks associated with payday loans when you’re in urgent need of quick cash.

Family in financial trouble and stressing over finances and payday loans

If a bank rejects your loan application and you need money fast, you may turn consider alternatives such as payday lenders.

While payday loans may be easy to get, there are a number of dangers associated with them. It’s important to know the dangers before applying, and to be ware there are ethical alternatives available.

What is a payday loan?

Payday loans are short-term loans provided at high interest rates which you usually repay when you are next paid. They are designed to help people to cope with unexpected expenses.

This form of loan is generally targeted towards people with a poor credit score who may struggle to access affordable credit elsewhere.

It can be easy to be accepted, however, the interest charged is usually very high, sometimes upwards of 1,000%.

The interest rate charged on payday loans is not the only issue. Let’s explore the dangers further.

Are payday loans expensive?

In the United Kingdom lenders are required to advertise the charge for borrowing money. This is known as the Annual Percentage Rate (APR).

The typical APR from payday lenders can exceed 1,000%, deterring potential new customers. To overcome this, payday lenders will advertise a ‘fee’ instead of an APR as it looks less daunting.

For example, a £1,000 payday loan borrowed over 6 months may have a fee of £933, the total repayable is £1,993.

To put this into perspective, if you borrowed the same amount from Serve and Protect at 13.5% APR over the course of 12 months, the total repayable is £1,074.

This means borrowing from your credit union is £919 cheaper over a year than what some payday lenders charge for just 6 months!

Why are payday loans so dangerous?

The main danger with payday loans is something called the ‘cycle of debt’.

The debt cycle can start when someone, short on cash, turns to a payday lender for help. If the same happens again next month and you struggle to meet your repayment, you may be forced to borrow again.

Interest is usually charged per day by payday lenders. The larger your loan and the longer you go without repaying, the more you will be charged in interest. If you were to miss your repayment, you may also be charged fees on top.

Therefore, if you cannot make your repayment you are left with a difficult decision – to take out another loan to cover it, or miss your repayment and deal with the fees.

Can payday loans affect my credit profile?

If you repay your payday loan on time and stick to the agreement, your credit score will not usually be damaged. However, some lenders may consider the fact that you have taken a payday loan as a reason not to lend you money.

Some mortgage providers specifically state that they will not lend to applicants with a history of payday loans, even if it has been repaid in full and on time. This is because it indicates there is an underlying problem with budgeting and money management.

Payday loans can stay on your credit report for up to six years. If you are planning to apply for a mortgage, your ability to borrow may be severely limited with a history of payday loans.

How can I deal with my existing payday loans?

If you’re paying off high-interest credit, debt consolidation could help you get back on track.

Debt consolidation involves taking out a loan to repay all your existing debts. You are then left with one manageable monthly repayment, often at a lower interest rate.

Consolidating your debt is a great way to save money and reduce your financial stress. For more information about consolidating your debt with Serve and Protect, visit our loan calculator.

An ethical alternative to payday loans

Credit unions are an ethical and affordable alternative to payday lenders.

At Serve and Protect, what you see is what you get. There are no hidden fees or early repayment penalties. We also provide peace of mind with free life cover on all savings and loans.

To see what you could borrow, try out our free and easy to use loan calculator.

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