Payday Advance : A Very Costly Debt
Most of us have experienced running short of cash towards the end of the month, when we simply don’t have enough funds to see us through to our next payday. Most of us get through these days or weeks by resorting to an overdraft, or using a credit card to pay for day to day expenses.
This is all well and good, providing you have a plan to clear the debt as soon as possible, and of course providing that you actually have the option of using an overdraft or credit card.
Unfortunately, with many millions of us now mired in debt, a lot of people find that their overdraft is at its limit, and the cards are all maxxed out – and yet are still facing a cash crunch at the end of the month.
Payday Loans : A Last Resort
It’s at this point that payday loans come into the picture. They’re a fast and easy way of borrowing a few hundred pounds to see you through the money gap. There’s usually no credit check, can be applied for online, and approval is almost certain provided you have a regular income and a bank account with a suitable debit card.
There’s no doubt that these payday advances can be a lifesaver, but there are two very significant problems: extremely high cost, and getting trapped in a payday loan debt cycle.
Cost
No one can seriously claim that payday loans are cheap. Typically, you;ll pay a fee of £25 for every £100 you borrow, although of course this fee can vary from lender to lender. Not cheap by any means, but maybe a price worth paying if you’re in a real financial emergency.
Payday Trap
The second problem is the ease of ‘renewal’ of these loans. Simply by paying another charge, you can defer repayment of your debt for another month. It’s easy to see how this can become a real problem, with the borrower becoming dependent on taking out a new loan each month because they can’t afford to repay the original one, and being charged sky-high fees each month to do so.
Regulation?
This state of affairs has lead to calls for the industry to be more heavily regulated, and there are signs that lending criteria are becoming stricter. This is apparent in the number of companies now requiring that once a loan has been ‘renewed’ twice, each subsequent renewal must be for a smaller amount, eventually leading to the debt being fully cleared.
Should Payday Loans Be Avoided?
Despite the high cost and risk of becoming trapped by payday loan debt, it’s got to be said that there are times when wage advances can make sense. If you have a real problem because of an unforeseen expense, and you’re confident that you’ll be able to clear the debt fully within a maximum of a month or two, then these loans can be a quick and easy way of tiding you over.
It’s when they become a permanent feature in a budget that the warning bells should be ringing loudly.
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