How to break the payday loan cycle
1st Jan 2015 Managing your Money
Although the introduction of a cap on charges by the government at the beginning of 2015 reduced some of the fees and costs of payday loans, they're still an expensive way to borrow. Here’s how to break the cycle.
Always repay on time
It’s important to avoid late payment charges or default fees. Charges start to mount up over time.
If you still haven’t paid up after a couple of months your debt may be passed to a debt collection agency. They may pursue you quite aggressively for the outstanding money, which can be stressful.
Always repay in full
This avoids the loan being rolled over—sometimes called a deferral or rollover. The lender needs to give you the details of any loan extension it offers you.
Don’t sign up for this, because fees and interest will just start to build on each other.
If you can’t pay it, seek advice
Don’t take out a loan to pay off an existing loan. A payday loan is a non-priority debt. That means, it’s not secured against your home and is not as important as paying your council tax, utility bills, or mortgage and rent.
If you can’t pay, then cancel the CPA agreement (Continuous Payment Authority) that you have set up by phoning your bank and asking them to stop releasing payments to the payday loan company. Then seek debt advice immediately.
Read more: How to get your friends to pay you back
Try not to use a payday loan
Put simply, it’s best to avoid payday loans altogether. If you are thinking of taking one out, then get debt advice before you do.
This is because if you are having to borrow at an expensive rate of interest to pay for household essentials, then you would benefit from having a detailed look at your finances and finding a way to cut your expenses, reschedule existing debt, and freeing up more money for bills and living costs.
A free debt charity can help you with this.
Read more: How to check and improve your credit rating
Look for alternative forms of credit
While a credit card might charge an annual percentage interest rate of 18 per cent, a payday loan equivalent over a year could be 1,500 per cent.
Usually, people opt for a payday loan when they already have debts, they have run out of other lines of credit, they are struggling to pay essential bills, or they want some short-term cash for an emergency. This short-term cash flow comes at a high price.
You might be better off going for a loan which lasts for a longer time, but which has lower interest rates and which is less likely to affect your credit score.
Using payday loans regularly may deter other lenders from offering you credit in the future, as it suggests that you are having difficulty managing credit and meeting your other financial commitments.
Read more: How to cope with and manage debt
Use a debt charity
If you’re struggling to repay loans, credit cards and other bills, you can get free, confidential advice from a debt advice service like National Debtline or StepChange Debt Charity.
According to a report in 2016 by Citizens Advice, most people who seek help for payday loan problems have other debts and money issues which need sorting out. The counselling service can help you with this.
The charities have trained debt advisors, who can help you negotiate with your other creditors and enable you to draw up a budget and repayment plan going forward. That way, you won’t need to keep taking out more credit.
You don’t need to pay for debt advice. It’s best to go to a charity rather than a debt management agency as you will receive impartial advice.
The Citizens Advice report found that only 8 per cent of clients who sought advice on payday loans had this as a sole issue. In fact, 87 per cent had one or more other debt issues, which included benefit and tax credit issues, and housing issues.
Many payday loan consumers stated they had either a disability or long-term health condition. That’s why looking at the whole of your income and expenditure can be useful and help you get back on track for the long term.
Read more: How to clear your credit card debt quickly
Draw up a budget
Often people need short-term credit because they don’t have enough money left at the end of the month to pay essential bills.
By drawing up a budget and spending plan, either by yourself or with the help of a debt counsellor, you can take back control of your finances.
Some excellent online budget tools are free from National Debtline and the Citizens Advice Bureau.
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