Think twice before taking out a payday loan

22 May 2012 16:43:52

Payday loan customers may experience severe financial problems in future.

If you're thinking of applying for a payday loan, you may want to think carefully following new research from Which?. The consumer watchdog found that some people are relying on these short-term loans to pay for day-to-day essentials, with many of these rapidly slipping into serious debt when they cannot pay off their loans on time.

Three-fifths use loans for essentials
The majority of people who take out payday loans use the funds to pay for essentials, according to the latest Which? investigation. Researchers found that more than 60% were using the loans to buy items such as food, nappies or petrol, or to pay outstanding bills. This suggests that many of those who turn to this form of credit are already struggling to keep on top of their finances and may not be able to manage their borrowing efficiently.

Payday loans often lead to bigger problems
The Which? study revealed that many people who take out payday loans subsequently fall into serious debt. One in three respondents said they had experienced greater financial problems as a result of relying on this form of credit, while 45% admitted they had been hit with charges they were not expecting. More than half (57%) went on to take out another loan, while 45% had rolled over their existing payday loan at least once. Doing so can lead to sizeable penalty charges, with one payday loan provider - Quid24.com - charging £150 if a customer repaid their loan just 10 days late.

Tougher rules needed to protect consumers
Which? believes regulators should keep a closer eye on payday loans companies to ensure consumers are protected from these charges. Executive director Richard Lloyd claimed: "At its worst, this booming £2bn industry can be seriously bad news for borrowers who are struggling to afford food or pay their bills. People are getting caught up in a debt trap, whacked with high penalty charges, or encouraged to roll over payments and take out more loans at inflated rates."

Sarah Brooks, from campaign group Consumer Focus, described the findings as "extremely troubling" and agreed that the Office of Fair Trading should act to protect people from spiralling debt. She revealed: "We have long held concerns about the behaviour of some payday lenders and whether consumers are losing out because this industry is not regulated strongly enough. Millions are turning to these loans in the current economic climate and it is usually those on lower incomes that suffer most."

What to do if you're considering a payday loan
If you've been thinking of taking out this type of loan, it's worth going online to compare personal loans instead, as these tend to have much lower interest rates and allow you to repay the debt over several years. Alternatively, you may be able to get an approved overdraft from your bank account provider, although make sure you understand the costs involved if you go down this route.

Anyone who is struggling with debt should also consider seeking free advice from a charity, such as the Money Advice Trust or the Consumer Credit Counselling Service.

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