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The dangers of payday loans

If you needed to borrow money at short notice, knowing the dangers of payday loans can help you to borrow responsibly and not face the consequences for years to come.

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If you needed to borrow money quickly and a bank or building society doesn’t accept your loan application, you may think your next option is a payday loan.

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

What is a payday loan?

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

Payday loans are targeted towards people with a poor credit score who may struggle to access affordable credit elsewhere.

It can be very easy to be accepted for a payday loan. 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 charged by payday lenders can often be higher than 1,000%, which is off-putting to 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 Credit Union at 13.5% APR over the course of 12 months, the total repayable is £1,074.

This means it costs around £919 less to borrow from your credit union over a whole year compared to 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 cycle of debt is where you are short on cash one month, so you take a payday loan to cover you until you are paid. 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 on payday loans. 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 or purchase a car on finance, your ability to borrow may be severely limited with payday loans on your credit history.

How can I deal with my existing payday loans?

If you are currently paying off high interest credit such as payday loans or credit cards, debt consolidation could be an option to get you back on your feet.

Debt consolidation is where you take out a loan for the total amount you currently owe, and repay all of your existing debt. 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 on your monthly repayments 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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