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The payday loan trap: Throwing good money after bad
UPDATE: 1 July 2014 – new rules from the Financial Conduct Authority (FCA) means that payday loan companies:
- cannot rollover an outstanding payday loan balance more than twice
- must send the debtor an information sheet with contact details for various debt advice organisations. A copy of this information sheet can be seen here
- cannot make more than two attempts to deduct money from a debtor’s bank account by means of Continuous Payment Authority (CPA) unless a rollover has been agreed.
- Must now include a prominent risk warning on all financial promotions.
We’ve seen a huge rise in the number people approaching us for debt help after taking out several payday loans and not being able to pay them back.
This year, five times as many people have contacted us for help with multiple payday loans than we saw three years ago.
While there’s much debate about whether payday loans are a good idea or not, few could argue that they should only ever be a short term solution and taking out multiple payday loans is usually a sign of an underlying problem that needs debt help.
An ostrich state of mind
It can be surprising how often we make decisions that will help us in the short term but will leave us a bigger problem to deal with down the line, but this is the state of mind that leads to multiple payday loans.
We all bury our heads in the sand from time to time, when the reality of your situation’s too scary to face head on it’s easy to put it off for another month. It’s a bit like the feeling you get when you know that the housework needs doing but decide to put it off until tomorrow. Taking out an extra payday loan means another month before you’ve to face up to your debt problem.
The problem is that next month comes around too quickly and rather than solving the problem, taking out multiple payday loans only makes the problem worse when you eventually try to get your finances sorted out. This has become such an issue that we’ve seen a massive rise in the number of people coming to us with dealing with more than ten payday loans at the same time.
What’s a payday loan?
A payday loan is a short term loan. They tend to last for about a month and usually will be timed so you repay the whole debt on your payday. The interest rates are generally much higher than the average personal loan because they’re taken out over short periods of time and also because the credit checks are often less strict.
Payments on payday loans are taken from a debit card, which is trickier to cancel than a Direct Debit (if you’re in this situation we’ve a handy blogpost on how to stop payments on a payday loan).
Payday loans – how it happens
With so many people struggling and more conventional forms of credit harder to come by it can be very easy to take out a payday loan. The extra few hundred pounds that they offer may not provide a long term solution but it can keep things ticking along.
If you’re offered the chance to have a little bit of extra money with minimal credit checks then it can be tempting, even if you’ve no firm idea of how to repay the debt.
The payday loan cycle
Once you’ve taken out your first payday loan things will usually settle down for the following month. The little bit of extra money has calmed the financial storm and you can go back to normality.
The problem can come during the following month. If you don’t have the money to repay the first payday loan it can be tempting to take up the offer to roll it over for another month, giving you a little bit of time to sort things out but having to pay out another month of interest.
Only delaying the payday loan isn’t enough because you’re still short of the money you need to cover everything. You think back to how the loan sorted things out the month before, so you take out another one to help you this month. You know that it mightn’t be a good idea but at least you won’t have to face up to it until the next month.
Once you’ve done it once it can be very tempting to keep the cycle going, taking out a new payday loan every month and recycling the ones you already have out. Common sense would tell you it’s a bad idea but it’s hard to think with your rational mind when you’re stressed out about your finances.
Payday loan help is available
If you find yourself with multiple payday loans and don’t know how to repay them, get in touch with us. You can get free debt advice using our online tool, Debt Remedy. We can help you make a realistic plan to get your finances back on track, especially if you’ve got multiple payday loans.