Payday loans are easy and accessible and therefore very tempting if you need some emergency money - you can even get one on a smart phone. But their high interest rates can quickly you get into a spiral of lethal debt so you want to think twice before you bridge the gap with a payday loan. Here we share with you five reasons why they are best avoided if possible.
1. Interest rates are crippling
The interest rates that come with payday loans are enough to make you weep. Pretty much all payday lenders charge APRs that are well into the 1,000% range (we're not even joking).
APR (Annual Percentage Rate) is the interest rate that you would pay over a year. While you might think that because you're only borrowing the money for a short space of time, you won't be charged much interest, this isn't the case.
The result of such high rates is that your interest could hit double figures in a very short time - this is how they make money out of you! The good news is that in 2015, the amount of interest that can be charged on a payday loan was capped at 0.8% per day, but this is still a lot.
2. Missing repayments could seriously cost you
Not only will you be forking out interest on your loan pretty much from the day you receive it, but you'll also be faced with other charges on top of this. Luckily, the FCA (Financial Conduct Authority) have enforced a late repayment fee cap at £15, meaning lenders won't be able to charge you anything above that each time you miss a payment.
However, with these sorts of charges, pay day loans still work out as the most expensive option available - you could end up being charged more in a month than you would do in an entire year using a credit card!
3. They can damage your credit score
Even if you pay your loan back in a matter of a day, just the fact you took out a payday loan in the first place could prevent you from getting a mortgage later on in life. These loans will appear on your credit report, and some mortgage lenders won't go near anyone who has taken out a payday loan, as it gives the impression you're not great at managing your cash.
4. They can take your money without your consent
When you sign up to a payday loan, they'll often ask you to sign up to Continuous Payment Authority (CPA) where you tell them the number on the front of your bank card. Most won't inform you that signing up to this gives the lender the authority to take repayment money from your account any time they like.
The law now states that they're only allowed to make two tries of taking your money if there's insufficient funds in your account, but if they do take your money without you realising, this could cause problems when it messes up your monthly budget and you have other bills to pay.
5. They prey on the vulnerable
Think of it like this: if you're needing to take out a payday loan, it's likely you're struggling to budget effectively, and those who struggle to budget tend to also struggle to repay borrowed money on time. If you're in enough financial trouble to consider taking one of these loans out in the first place then it's more than likely you will not be able to afford to pay back interest rates such as these. And the sad thing is that these companies rely on you not being able to make your repayments as one of their main revenue streams.