Payday loans: Short-term borrowing that can last a long time

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Have you been tempted to take out a short-term loan to tide you over till payday? It's not a bad idea in principle, but are you sure you can pay the money back and do you understand how much you'll have to pay overall?

Short term borrowing, or payday loans as they’re more commonly known, are supposed to help people cover unexpected expenses, just until they next get paid. Most traditional loans are arranged to last for a few years, whereas these loans can be borrowed and paid back within a few days, depending on when your payday is.

Payday loans are supposed to cover unexpected expenses – if you find you’re using them to cover your essentials, like food and utility bills, this is a warning sign that all is not well with your finances.

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You need to keep an eye on when the repayments are due and how much the interest is. If you don’t pay the money back as arranged, the company you’ve borrowed from may charge you a late payment fee.

Taking out a new loan to pay off an old one can be risky as well. The new loan will have to cover the cost of the original loan plus the interest, and will have more interest attached to it as well. If you keep borrowing like this, the debt can easily snowball and become unmanageable.

The Financial Conduct Authority (FCA), is looking into how well people are managing this type of borrowing and they’re considering tightening the rules on high cost consumer credit, including payday loans.

In January 2015, the FCA introduced a price cap on the interest payday loan companies are allowed to charge. It’s now capped at 0.8% per day of the amount borrowed. And if you miss payments, default charges cannot exceed £15.

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Altogether, the total cost for borrowing from a payday loan company cannot be more than twice the amount of what you borrowed in the first place. So you’ll never back more than double, no matter how much interest or charges build up over time.

There are circumstances where using a payday loan makes sense, but you need to ask yourself exactly the same questions you’d ask if you were planning to take out a long term loan from a traditional lender. For instance, do you really need to borrow the money? Or is this a cost that could be covered if you cut back on spending in other areas and put a little more aside?

If you’re struggling to pay back your payday loan, make sure you get in touch with the lender and let them know – they might be able to freeze the interest and charges on your debt. If you feel your debts are out of control, or you don’t get anywhere when you speak to your loan provider, you should seek the advice of a trained debt advisor. There’s always a way out of debt and they will be able to recommend the best solution for you.

Debt Advisory Centre: 0161 871 4881