Think you may need a payday loan? Well, I may shock you by saying that I don’t think it’s always a bad idea.
A payday loan is bad, right?
Now I’m going to poke my head above the parapet here and say that I don’t think payday loan companies are necessarily bad. Payday loans have had a bad press over the years. Sometimes rightly so. People were forced into borrowing more and more until finally, they owed more than they could ever imagine being able to pay back.
Fortunately, the FCA has clamped down on a lot of these companies and we have seen a massive reduction in their numbers. New regulations meant that fees charged had to be capped.
APR rates may sound horrendous when you see the adverts. Over 1000%? Ouch. But remember that these are only short term loans, so APR figures aren’t always appropriate.
How much will a payday loan cost?
Imagine you need to borrow £100 to repair your car and it’s still two weeks until payday. You could use your overdraft or go to Wonga. Wonga charge 1509% APR which sounds steep. But to borrow that amount over two weeks will cost you £11.20 in interest.
Now compare this to an overdraft from your bank. The Halifax Reward Current Account would charge you between £14 and £42 over the same period if you are in your planned overdraft. If you go into an unplanned overdraft, you will be charged £70.
The Santander Everyday Current Account will also charge between £14 and £42 in a planned overdraft and £84 for anything unplanned.
As you can see, borrowing from Wonga will cost you far less. But bear in mind you can attract extra charges if you fail to pay your payday loan back on time. There is a £15 fee if you have not paid by the 11 pm on the third day after your repayment date. You will then continue to be charged 0.8% interest per day for 30 days.
All payday loan companies will charge similar types of fees, but since the cap, they are now far lower.
Anything else to consider?
Please remember that even if you settle your payday loan without any issues, this will be noted on your credit file. Some lenders will see the fact (rightly or wrongly) that because you took out a short term loan, you are not very good at managing finances. This could damage your chances of taking out a mortgage or larger loan at a later date.
Obviously, the ideal solution would be to try and avoid the situation altogether. Try putting a small amount of money away each month as an emergency fund. Take a look at the Chip app if you need some help. However, I realise that this isn’t possible for everyone. I will leave it up to you to decide on how ethical payday loan companies are.
If you are having trouble with debt and find yourself more and more reliant on payday loans, then please visit StepChange for some free advice.