As our politicians fret over the issues that could seriously hamper national and global economic recovery (China! Brexit! Middle East instability!), millions of British families are struggling with credit and debt problems. Many cash-strapped people who have few or no other options have turned to the payday loan industry, which seemed to really come into its own in Britain in the wake of the financial crisis of 2007-2008.
Actually the industry has its roots in nineteenth-century America, but payday lending hit our shores in a big way in the 1990s, with loans chain The Money Shop opening up locations all across the country. But there’s no denying that the 2008 recession was a boon for the industry; by 2009 over four million payday loans had been taken out in the UK. Payday lenders took a bit of a hit when the regulators bore down in 2014, but the industry is still worth around £2 billion.
While that’s great for the lenders it hasn’t always been so wonderful for borrowers. If you find yourself in dire need of cash and are tempted to turn to a payday lender, there are some things you should know about these short-term, high-interest loans.
Although payday loans have traditionally been, as indicated above, very short-term (two weeks or one month), many payday lenders now give their customers the option to pay the loan back over a slightly longer period, usually three months. While this might make things easier on your budget, keep in mind that you will have to pay even more interest on an already high-interest loan if you stretch the loan term beyond 30 days. And even though there is now a cap on how much you pay – you’ll never have to pay more than double the amount borrowed – these loans can still be very expensive.
Whether you opt for a one-month or three-month loan it’s important that you know how you are going to repay it. You must assess your situation honestly instead of relying on wishful thinking. If you can’t afford to pay the loan back on time, then you really can’t afford it.
As well, keep in mind that even if you do pay the loan back on time, you very likely will not have heard the last from that lender. Having already made money off of you, they’ll behave as most businesses do with “good customers” – they’ll seek repeat business. They may try to tempt you with additional, possibly “discounted” offers. But don’t cave to pressure. A payday loan should be a rarely used tool, not a regular income stream.
One of the most important points to know is that not all lenders are alike. As is the case with other segments of the loan industry, payday lending is competitive and there are many lenders from which to choose. No matter how desperate you may be for some quick cash, don’t just walk into the first high street shop you see and apply for a loan, and don’t rely on the adverts on the Internet. Before you borrow, shop around and compare lenders’ interest rates and other fees and charges, and research their business practices. The Readies site is a good independent resource because not only do they display the rates and terms of a wide variety of lenders, but unlike many loan comparison sites, they also feature honest feedback from actual customers.
Always explore all of your options.
For various reasons, millions of Britons are excluded from “mainstream” finance, which is why so many people turn to payday loans in the first place. Though many experts love to hate payday loans, this type of loan is not always the worst choice if you heed the above caveats and do your homework before applying for a loan. Even so it’s always a good idea to explore alternatives to payday loans.
The problem is that if you don’t have excellent credit, those alternatives can be pretty limited. If there’s no family member or friend from whom you can borrow, you’re pretty much at the mercy of the system.
Many people turn to their banks first – provided, that is, that they have one; a growing number of Brits are “unbanked”. If you can’t get a conventional loan from your bank, inquire about getting an overdraft or an extension of your existing overdraft. Compare the cost of an overdraft to the cost of a payday loan.
But if your bank won’t help you, where else can you turn? Some experts have touted credit unions as a viable solution to Britain’s looming debt crisis (as well as its savings crisis). At present credit unions do a reasonable job of serving low-income consumers but, as noted by Mark Lyonette, chief executive of the Association of British Credit Unions Limited (Abcul), a credit union can ultimately be successful only if membership continues to grow. Credit unions need to attract more members who have a regular income, and as these memberships increase, the unions will be able to offer more affordable loans to more people.
Thanks to increased awareness and education programs, credit unions are making progress not only in offering affordable credit, but also in raising financial literacy in the UK and creating a “savings culture” (in the words of Margaret Roffe, a manager at Genesis Housing Association). Indeed, the development of a robust savings culture in the UK could help mitigate the consumer debt crisis. That said, it is often difficult to even think about saving when one is scrambling to make the rent or pay the heating bill. And this brings us back to payday loans and the main takeaway lesson thereof: a short-term loan can get you over a rough spot, but don’t make it a habit.
One final point: If you do get into a financial bind – or it seems you’re headed in that direction – get help. There are numerous services, such as the Money Advice Service or Citizens Advice, which provide useful information about everything from budgeting to government benefits to debt help. There is absolutely no shame in asking for help; to the contrary, it’s one of the smartest things you can do in order to get your finances back on track.