Payday Loans: Good or Bad?

The good

Emergency cash for the rent, a bill, or whatever life crisis there is a payday loan company may serve a purpose in that they can help you out of some sticky situations, fast. Getting the loan can be very straightforward as all you do is an online application and can even get the money in your bank account the same day. It's all perhaps a bit too easy!

You can borrow anything from £50 to around £2,000, even for those with poor credit history who would struggle to be approved elsewhere. With some firms, if you pay your loan back early, you could even save money as you only pay interest on the days you borrowed it. And if it turns out you need more money after taking out a loan, you may be able to top it up.

You don't necessarily have to pay back the entire lump once payday swings around. For many payday firms, you can take out a loan and choose to pay it off over a few months or even a year.

The bad

However, the staggeringly high interest rates mean you could end up paying double the original amount you wanted to borrow. For example, Peachy.co.uk says a £500 loan spread out over 10 months will cost a total of £977.62 by the time it's paid off. That's nearly double in interest!

Many loans, however, are only taken out for a couple of weeks or a month. Another representative example that says a £200 loan over 30 days will cost you £48 in interest, so you'd pay back a total of £248.

The interest rates are so high because of the risks involved. Someone needing short-term cash may be in difficult financial circumstances and they may not be able to pay it back. It's not particularly helpful to look at the APR (Annual Percentage Rate) rates, which is so eye watering, because APRs are worked out as if the loan was a yearlong.

Here's a finance example taken directly from an active payday loan website.

Finance Example: Borrow £250 for 3 months.

Total repayment: £380.65 in 3 monthly payments of £126.88.

Interest p.a: 292.25% (fixed).

Representative: 1255.66%APR.

If you miss your repayment, not only could there be a fee (it depends on the lender), but you could have to pay additional interest on the outstanding balance for each day that you fail to pay it.

Wonga's demise

Payday lender Wonga announced its intention to go into administration (August 2018) after losing its battle to stay afloat.

The company said in a statement that it had assessed all options and had decided that administration was the appropriate route.

It had already stopped accepting new loan applications as it fought to stave off collapse.

Its demise in the UK follows a surge in compensation claims amid a government clampdown on payday lenders.

The collapse leaves an estimated 200,000 customers still owing more than £400m in short-term loans. But borrowers were told to continue making payments and administrators are expected to sell Wonga's loan book to another lending firm.

The ugly

Borrowers can be trapped in a vicious cycle of taking out further money to pay off a previous loan. Reports from regular payday borrowers have highlighted a 'spiral of doom' scenario, which puts untold mental anguish and stress on the borrowers.

In addition, if you have multiple payday loans within 12 months, this can seriously negatively impact your credit score. Each payday loan is credit checked and the more of these checks you have on your file within a short space of time; the higher the eyebrows are raised.

Conclusion

Payday loans really should be the very last option for your emergency cash needs. They can help when all other avenues are closed, but you must ensure that you pay it back on time and don't get sucked into a never-ending cycle of robbing 'Peter to pay Paul'.