Payday loans: What you should know

Payday loans factsPic: Corbis

The recession has undoubtedly caused a surge in the number of people seeking short-term loans, and payday lenders have subsequently made the news, often for all the wrong reasons. If you're under pressure to pay bills and are considering the fast-cash sums available from such borrowing, here's what you should know.

The interest rates
Payday lenders make much of the fact that they have to publish an annual percentage rate, or APR, which is understandably off-putting, given that in many cases it's almost 2,000 per cent, and in others is nearer 5,000 per cent. Because these are short-term loans, typically due to be paid back within 30 days, the actual amount you pay back includes much less than the annual interest. However, if you did not pay the loan off within three months, you'd end up paying double what you borrowed, not to mention late payment charges.

Most lenders have strict criteria about who they will lend money to, but in the case of payday lenders, these are often much more lax, and the Office of Fair Trading claims many fail to carry out proper checks. Therefore, some borrowers manage to get their hands on the cash fast, but find they are unable to pay by the deadline, and things can quickly spiral out of control. Before you seek out money in the short-term, make sure you can repay it. If you can't afford it this month, are you sure you'll be able to pay the borrowed amount, plus the interest, when your next payday arrives?

The 'roll over'
According to the Office of Fair Trading, some 30 per cent of borrowers take the tempting offer of 'rolling over' their loan, meaning they miss the original payment deadline, and continue borrowing the same amount whilst paying off only the interest. By doing this though, you still won't have paid off the money you borrowed in the first place.

The repayments
In the majority of cases, payday lenders take repayments directly from your debit card. Known as 'continuous payment authorities' (CPAs), this allows lenders to take money without checking with you first. And although your bank is required to cancel any CPAs that you request are cancelled, some find these easy to set up payment processes make life difficult.

Should you miss any payments, you will likely be bombarded with calls, both at work and at home, as well as texts and emails, chasing you for the cash, and this can put added pressure on those who are often already swamped by debt problems. If a situation arises in which you simply cannot make the repayments, lenders should offer a repayment plan to help you get out of debt.

The alternatives
Many consumers have used payday lending to help them out of a tight spot, repaid on time and used this kind of short-term lending to their advantage. However, it is often the case that those who take up these kinds of offers from payday lenders struggle to repay and end up in even worse financial strife.

If at all possible, it is advisable to seek alternatives. Other lenders may be able to offer you a cheaper loan over a longer period, and credit unions or peer-to-peer lending may be able to lend small amounts even for those with less than perfect credit ratings. Alternatively, consider asking a family member for help, as you may be able to avoid those exorbitant interest rates this way. Just do be sure to repay your debt as quickly as possible, or as agreed.

Have you used a payday lender in the last year? Tell us about your experience below...