Payday Loan Pitfalls And Their Solution

Payday Loan Pitfalls And Their Solution
March 5, 2018 Stacey Corrin
Payday Loan Pitfalls And Their Solution

If you are considering borrowing money from a short-term loan lender, you are going to want to be aware of the pitfalls of payday loans and how you can avoid them.

In this article, we will take a look at the three major risks associated with taking out a payday loan and identify how you can steer clear of them.

Getting into a cycle of debt

So what exactly is a cycle of debt (also sometimes called a debt spiral)? Put simply, this is when you keep borrowing money to pay off your debts.

This can happen, for example, when you cannot afford to pay off the original amount that you borrowed, resulting in you ending up having to borrow more money to pay off that first loan.

Then, more money to be able to pay off the next debt. And so it goes on.

4 tips to avoid getting into a debt spiral

Payday Loan Pitfalls And Their Solution

The first rule of taking out any loan is to not borrow any more than you can comfortably afford to repay.

This way, you should hopefully not find yourself having to borrow more money to cover the cost of paying back your original loan.

If you do find yourself in a cycle of debt, it is important to realise that borrowing more and more money is not a good way to get yourself out of the cycle.

Those who are struggling to pay back debts can speak to a debt charity, such as StepChange, for free advice.

The Golden rule of avoiding this payday loan pitfall: do not borrow what you cannot comfortably afford to repay.

Taking out a loan you cannot afford

APR of payday loans can be very high.

When you take out a loan, you should be able to see the loan’s APR or annual percentage rate. This information tells you how much interest there will be on a loan on an annual basis.

Some short-term loans are more expensive than others. The APR is a useful way to compare different loans to find the best deal for you.

Additionally, over the last few years, various changes have been brought in by the Financial Conduct Authority (FCA). This is the body that regulates the industry.

These include price caps on high-cost short-term financial products, to ensure that borrowers are treated fairly. Price caps also restrict how much debt someone can get into when taking out a payday loan. For example, there is now a total cost cap of 100%. This means that no borrower should ever pay back more than 100% of what they originally borrowed in interest and fees.

Checking the APR is a Golden rule to choose a loan that you can afford

Payday Loan Pitfalls And Their Solution

When you are looking at what different lenders are offering, ensure that you check the APR.

But also look at how much you will actually be paying back in total. And over what period of time.

Check what difference it makes to the total repayment amount if you change how long you would like to take to pay the loan back.

UK Payday Loan brokers like CashLady could help you to find the best possible deal.

The golden rule of avoiding this payday loan pitfall: do your research and make sure that you are happy with the amount you will have to repay.

Borrowing from unauthorised lenders

It is important to make sure that you know exactly who you are borrowing money from.

All payday lenders must have a licence from the FCA in order to operate.

Always ensure that any lender you are looking to borrow money from is authorised by the Financial Conduct Authority.

You can check if a payday lender is regulated and authorised by the FCA by going to the Financial Services Register.

If you are using a loan broker, ensure that the lenders they are dealing with are properly licensed. CashLady, for example, only deals with FCA authorised loan providers.

Summary: avoid the pitfalls of payday loans

As is the case when taking out most financial products, short-term loans have a number of hazards. It is important to be aware of the risks so that you can avoid them.

In order to avoid getting into a cycle of debt, ensure that you only ever borrow what you can comfortably afford to repay. Equally, make sure that you know exactly how much the interest is going to cost you. Do your research to find the best deal for you.

Finally, check that you are not about to fall foul of an unauthorised lender, by confirming that they are on the Financial Services Register.

 

3 Payday Loan Pitfalls And Their Solution

 

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