5 Steps to Avoiding Dangerous Payday Loans

November 5th, 2012 - Posted by in Blog, Saving Money

Oh! You ran out of cash again this week? And Baby still needs nappies – but you don’t have any money for them. 

We’ve all been there before. It’s a horrible feeling.

But the fact is, payday loans could be a great idea…but they’re more painful than needing to borrow money in the first place. The payday loan industry calls themselves the financial emergency services because they know you need those nappies and you’re willing to borrow the pounds you need to get them…plus a whole lot more.

Originally, the idea was, “Right, these people are running out of money before their payday. We can help them.” Then, it became, “Oh, look how much money we can make on these people’s sad situations!” And that’s what they did. They started charging ridiculous interest rates because they knew that people are desperate enough to pay them. For example, Wonga.com the UK’s leading payday loan company charges an APR (annual percentage rate) of 4214%, company that to Sainsbury’s Bank which charges 18.6%. This is a total scandal and takes advantage of people who are desperate for money.

Provider APR Loan amount Total charge for credit Total you repay in 1 year
Sainsbury's Bank 18.6% £1,000 £95 £1095
Wonga 4214% £1,000 £3,526.75 £4,526.75

 

How Wikipedia defines Payday Loans: A payday loan is a small, short-term unsecured loan “regardless of whether repayment of loans is linked to a borrower’s payday”. Pay day advance loans rely on the consumer having previous payroll and employment records.

Payday loans are merely a bandaid. And when those bandaids come off, they rip the hair out by the roots and cause even more pain.

Those loans are not the answer to surviving between paydays.

Many who get into these endless cycles end up paying as much as 5000% interest. Leaving the borrower owing way more money than he had in the beginning.

Then, when the next week comes round, he’s shorter than he was this week.

If you’ve already gotten into a payday loan, use this plan to help yourself get out. And if you find yourself tempted to get into payday loans, then this map will help you avoid the pitfall that others are climbing the walls to get out of.

Step 1: Set up your budget

The key to having enough money is knowing what you have to spend and staying within that. If you go to the movies and you have no clue whether or not you have the money to spend on tickets, you may likely end up overspending. But if you had followed a budget, you’d know if you truly had money to see that new Batman movie.

Step 2: Learn two new words: Need and Want

Learn the difference between “need” and “want.” Spending on a new computer game you wanted when you needed to pay the gas bill, could leave you in a shortfall come bill paying time. But realising that what you want only comes after what you need will save you from going into the red on your bank book so you can avoid having to get into a payday loan.

Step 3: Become a Happier scout

Scouts are always prepared and resourceful. Running out of milk is one problem, but going out to eat just because you didn’t have the right ingredients to make your pasta fazool is another. Instead of blowing your pounds at the cafe, improvise and substitute a different ingredient or make a totally different meal altogether. Use your resources to be cunning and clever and avoid the pitfalls of a payday loan cycle.

Step 4: Commit to an anti-payday loan stance

Make up your mind that you’re not going to get into payday loan – no matter what. If you fall short, ask family or friends for help (don’t make this a habit or you’ll find yourself alone – keep it for dire emergencies) or use your credit card – it will still be cheaper than a payday loan.

Step 5: Make paying down what you owe a priority

Make paying down what you owe the first thing on your agenda. Knocking out debt means that you’re no longer at the mercy of it and you’re free to spend on things you want, to save more and to stash that emergency fund that you so desperately need.

Whatever you do, stay away from payday loans. They are a dangerous cycle that many people can never get out of.

Further help:

What other tips can you share to help stay away from these kinds of loans?


  • http://www.smartloan.co.uk/ Smartloan

    While I agree that payday loans are not the answer and can cause more trouble and debt, there are other options. A smartloan is a cheaper alternative, and allows people to repay in affordable monthly installments to help avoid rolling the loan over. You’ll still get the cash you need quickly, but as a responsible lender, Smartloan will not lend to anyone who cannot afford to repay. The website is http://www.smartloan.co.uk for more info.

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