Should payday loans be banned?

There are times throughout our lives when we may be struggling with finances. Seasonal holidays such as Christmas may leave us short with the added expense, or we may be trying to pay off debts that we’ve previously accrued. At the time, you need money and when there aren’t many options available, it’s easy to turn to payday loan services. Some payday loan providers charge a staggering amount of APR, with Wonga charging an average of 1,509% APR and QuickQuid charging 1,294.9% representative APR.

Payday loans get you in more debt

Payday loans get you in more debt just due to the way they’re set up. To put this in perspective if you borrowed £600 off Wonga over a 6 month period, you’d have to pay £1138.29 back – nearly double the amount you borrowed. This is like putting £100 on top for every month you’ve borrowed it for. If you borrowed the £600 to pay bills, you are now in double the amount of debt that you were in before. This then encourages a cycle of borrowing to pay off the interest on previous debts, then allowing you to gain more interest on your new loan.

Short term loans aren’t used for their purpose

Because of the grotesque amount that these companies make from people in unfortunate situations, they have to market themselves in a certain sort of way to conform to industry standards.  They have to market their loans as short-term solutions to emergency situations – such as unexpected breakages with boilers, ovens and cars or unforeseen expenses such as emergency vet bills. QuickQuids slogan “restore some order” is designed for this reason, with their adverts playing on peoples panic to get money fast.

The truth is that payday loans are rarely used for this purpose, with most borrowers admitting that they need the money to cover day to day expenses. This may include utility bills, credit card costs or daily groceries. That means once you’ve been paid and paid off your payday loan, the chances are you’re going to again fall short on money for these everyday necessities – giving you the temptation to get another loan.

Aggressive late payment collections

So far, we’ve established how payday loan companies open a gateway to repeated borrowing with extremely high-interest rates. What’s worse is if you ever find that you’re not in a position to repay the debt in the period when it’s due, you may find yourself losing your possession’s. Their approach to people struggling to pay their loans are far from understanding, and their willingness to make alternative payment arrangements aren’t as flexible as they’d like you to think. If you miss a payment and set up a new arrangement, then somewhere down the line get to a month where you’re unable to pay again they’re likely to demand the full balance. If you can’t pay the balance in time, they will sell your debt to a collection agency who will then add a “collection fee” on top of the outstanding balance. These will demand at least a percentage of the debt when they arrive at your address and may or may not agree to a payment plan. If they can’t make a plan or you don’t have enough of a down payment on the day then they will enter your home and take possession of anything that is free of finance unless you can prove it belongs to someone else by providing the receipt. This leaves people feeling violated as their belongings that they’ve worked hard for are taken away and sold at auction for a fraction of their value price to minimally knock the debt down.

Loans affect your credit rating

Payday loans can also affect your credit rating, even if you pay them back on time. The fact you’ve taken out a short-term loan with such high interest shows you’re desperate for the money and regardless to circumstances most places will assume this is because you’re not handling your finances very well. As a result, some people may opt to simply not pay their bill rather than taking out costly short-term loans, which could then end up with their electric or gas being turned off in their homes. The system in place allows loan companies to start this cycle and put people in these positions, leading to further poverty as people are left to pay off interest on a loan that is practically a phantom debt. If you do miss payments on your loans you can expect your credit rating to take a huge hit, even if it is just interest.

Overall payday loans aren’t good for anyone. Try to choose other options of borrowing if you absolutely need to – ask friends or family to loan you the money or sell some of your possessions with a view to buying the luxury items back once you’re back on your feet.  Look into saving schemes to help you through periods where you may need a bit of extra cash, and always try to plan ahead. Avoid costly interest rates and the chances of your possessions being taken at a fraction of their value – avoid payday loans at all costs.

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