Be aware of the potential dangers of payday loans

16 July 2012 16:55:25

Payday loans should only be used for short-term emergency borrowing.

If you're considering taking out a payday loan, the chances are you're in need of some emergency cash to tide you over until your next pay cheque. Payday loans are a useful form of short-term borrowing and can provide a lifeline for some. However, an increasing number of people are turning to these loans despite lacking the means to pay the money back in time - a very risky and expensive strategy.

What are payday loans?
A payday loan is a form of lending where an individual borrows a small amount of money for a short period of time - usually a matter of days. The aim is to tide the person over until payday, when they pay back the amount borrowed in full. This type of borrowing tends to be expensive and the fees rapidly mount up if you fail to repay the loan on time.

When might this type of loan be useful?
There are circumstances where a payday loan might be a suitable form of borrowing. For instance, if you are waiting for a cheque to clear or cannot arrange an overdraft and need money in a hurry, a payday loan could be an option. Alternatively, if you have been faced with an unexpected financial outlay such as a new boiler or emergency car repairs and are struggling to make it to your next pay cheque, you might want to take out a one-off payday loan.

What are the dangers?
There are certain pitfalls to be aware of, however, and you should avoid relying on payday loans for long-term borrowing or in instances where money is likely to continue to be tight for some time to come. Dominik Lipnicki, director of Your Mortgage Decisions, revealed: "The main thing to remember about payday loans is it is a very short-term way of borrowing money. As soon as you use it as a long-term way of borrowing money, it becomes very, very expensive."

Mr Lipnicki explained that the interest rapidly builds up if you are unable to pay off your payday loan straightaway. "It is like a vicious circle, they will end up borrowing more to make that payment."

Problems with payday loans on the rise
Debt charities say the number of people falling into serious debt as a result of failing to manage their borrowing responsibly is rising. According to the Consumer Credit Counselling Service (CCCS), 17,414 people got in touch in 2011 with concerns about their payday loans, up from just 7,841 the previous year.

The figures reflect Mr Lipnicki's own experience of the situation. He confirmed: "We have seen a big increase in the number of consumers using payday loans to pay their rent, mortgage or their credit card payments, which they weren't designed for."

If you can imagine yourself getting into trouble as a result of taking out a payday loan, you should first try to exhaust all other options, including taking out a traditional personal loan over a longer period of time, applying for an extension to your bank overdraft or even borrowing from a relative. If none of these options are possible, you should consider contacting a debt advice charity for free and independent advice on how to improve your financial situation.

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