We've all seen the TV ads for payday loans featuring staff with fixed smiles and happy customers, skipping out of the shop with a wad of cash in their hands. Although these loans are supposedly a 'quick fix' for money troubles, the truth is that many people are left in worse debt than they began with as a result of the stratospheric interest rates (see the extra-small print). The Office of Fair Trading (OFT) has previously questioned the motives of these short-term lenders and now these high interest rates are to be reviewed. Here is a quick guide to payday loans.
What is a payday loan? A short-term, high-interest loan aiming to give people the cash they need before they get paid. These are usually for around £1,000 but some offer higher amounts.
Who are they targeting? The TV ads often claim that you are guaranteed to be accepted, regardless of your credit rating. This would therefore suggest that they are perhaps targeting those who may have been refused a loan by their banks. However, in the past it has been reported that some loans companies have even leant to under 18s.
When should you consider it? It can be easy to be tempted by their claim that the money will be in your bank in minutes without a credit check. But does that not seem a bit too good to be true? If something seems to be, it often is. Always think about your other options before considering a payday loan and see the regulations around responsible lending .
Is there another option? Bank loans come in many forms and offer varying amounts, interest rates and repayment periods. These often depend on your credit rating, as the banks want to be sure that you will be definitely able to pay the money back. You can view a guide to the different types of bank loans here.
Uncovering the truth
A study by Citizens Advice earlier this year found that some loans companies had lent money under 18s, those with mental health problems and even people who turned up drunk. Plus 87 per cent of loans companies did not ask to see any documents that would prove that people could afford to repay their loans.
It is important to think carefully before considering a payday loan, as the high interest rates can leave people feeling trapped and under even more pressure. Consider whether there is another option for you and if you were thinking of a personal loan but were refused in one bank, then there's still a chance another may accept you.