Should I take out a payday loan?

Should I take out a payday loan?

Summary: This article explains what a payday loan is and what to look out for if considering applying for one.

Payday loans are becoming more and more popular as a quick way to bump up the monthly income if things are a bit short. They are designed to be very short term, and are meant to be repaid, ideally, when the individual gets their next pay cheque. However, they often charge huge interest rates if not paid on time, with some charging over 2,500% APR.

I need some extra cash this month, and a payday loan seems the best solution, what should I look out for?

If an individual really needs to take out a payday loan, it is important to shop around for the best deal. Assuming the loan is repaid on time, there could be cheaper deals; although it is important to consider the charges that could be incurred by missing the payment date. Interest may be charged for each day beyond the original deadline, further increasing the initial debt. It is also worth checking that the lender follows what is known a Good Practice Customer Charter.

What happens if I can't repay the loan on time?

In this situation, it is important not to panic. The first step is to contact the lender to explain the situation. They may be prepared to extend the deadline; however, they may charge an additional fee. They may also charge interest for each day beyond the initial deadline. If the individual supplied their debit card details when applying for the loan, it is possible that the lender may automatically try to take the money owed, and if it is not available, the bank may also pass on charges. If in this situation, it is vital to start budgeting and prioritising the debt to clear it as fast as possible, and not take out another payday loan to clear the first, as this can quickly spiral out of control.

Further advice

If a payday loan appears to be the only option available, it may be worth taking time to review the household finances as if income is not sufficient to support outgoings, there is clearly a problem. There are alternative solutions available to those in need of financial assistance, such as a Debt Management Plan (DMP) or Individual Voluntary Arrangement (IVA).