The pitfalls of payday loans

Payday loans have a huge stigma attached to them and are now some of the most unpopular financial products – yet a quick look at the plethora of advertisements for “quick and easy cash” highlights just how established these lenders have become.

From household names such as Wonga to independent high-street businesses up and down the country, payday loans are big business. The industry is now worth billions of pounds a year.

But borrowers need to beware the pitfalls of these products. Whether it’s down to consumer ignorance or predatory lenders, many people have found that turning to a payday lender leads to a spiral of debt – and, in some cases, to family break-up and worse.

Payday loans are usually for no more than £500, lent over a period of a few days. But the interest rates are huge, and many borrowers often find they are unable to pay the money back on the due date.

Too often, customers then have to take out new loans to meet their new obligations – and so the spiral of misery continues.

And consider this: many of the people who feel the need to turn to payday lenders are people who can’t get credit from a bank or building society. The fact they need such a short-term cash injection in the first place suggests they are already financially stretched.

The government has begun to crack down on these lenders, though, in a bid to cut out of some of their sharper practices. And in defence of the industry, using a regulated payday lender – even at such high interest rates – is always preferable to relying on an illegal loan shark.

But as a rule of thumb, if you find yourself needing to use a payday lender more than once in a blue moon, it should alert you to the fact that you have money problems.

Charlotte Nelson, of, said: “Payday loans should only ever be used if all alternative finance has been exhausted.”

One such alternative is a “guarantor loan”. Although the interest on this type of loan is higher than on a loan from a high-street bank, it’s much cheaper than a payday loan. A friend or member of your family has to act as guarantor, meaning he or she will be liable if you are unable to pay it back, but if you know someone prepared to be your guarantor, it’s likely to be a much more satisfactory way of borrowing – and it can help repair your credit rating, too.