As most countries around the world are struggling to bring down their national debts as part of the new economic reality, many families and individuals are discovering that they also will need to make significant cuts to their own household budgets and to pay back debts that they may have accumulated when times were better. Unfortunately, with many jobs now paying reduced salaries and with shopping baskets and cars now costing more to fill, it is often much easier said than done to simply pay off our outstanding debts. But it is important when trying to clear debts or at the very least to tread water, that people do not take out loans with crazy interest rates and punitive charges. This article will examine one area of such loans that are open to abuse – payday loans.


Many people get tempted to borrow money using payday loans and when handled correctly they can occasionally be useful. However, with some companies charging interest rates as high as 2000% APR such loans are an extreme option and should only be approached with caution and when other credit options are not available. Payday loans work by allowing people to borrow small amounts of cash for as short a period as a week or a month, but in return they make their profits by charging higher interest rates than normal loans.


A typical payday loan will allow you to borrow anything from £50 to £1000 for a short period until you are paid in the following month. The Payday Loan company will normally charge around £30 for every £100 you borrow for every 31 days you borrow it. Although this doesn’t sound a great deal like that, it actually equates to a massive 2,255% APR. In principle payday loans are a good short-term stop-gap measure for accessing cash in an emergency without the need for you to go to your bank. As long as you can pay back the principle and interest before the month is up you will be ok. But if you get behind and find that you need to take another payday loan out the following month then you will find your debt spiralling out of control. This is why it is essential that you have budgeted to pay the cash advance back within the agreed time period.


There are of course other alternatives. If you have some room on your credit card you can take a cash advance on that, although again, you need to be prepared for some heavy interest if you don’t pay it back promptly. Similarly you can phone your bank and see if they will extend an overdraft, probably the option that will cost you the least in interest, but also the hardest to get if you are already struggling or already have a significant overdraft.


Remember, payday loans can be useful if well researched, but they can also make a bad problem even worse, so be careful.





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