I cannot get credit should I use a Payday Loan?

As a result of the credit crunch it is becoming more and more difficult to borrow. This is particularly the case if you have a poor credit rating. As such many people are turning to Payday loan companies and doorstep lenders for their borrowing needs. In June 2010, the insolvency trade body R3 reported that up to 67000 people who are struggling with debts have turned to a doorstep lender.

How does getting credit from Payday Lenders work?

The way doorstep lending works is that the lender provides relatively small cash loans normally ranging from £100 to £1000. Repayments are then made on a weekly basis in cash. These are collected by an agent who visits you at your home.

Payday loan companies lend out a cash sum which must be repaid in full at the end of the month “on payday”. Interest is charged but if the loan is not repaid extra interest and charges added will be extremely high.

The advantage of borrowing from these lender is that these organisations will normally lend to people who have poor credit ratings and cannot get credit elsewhere. However, it is very important to realise that any money you borrow from these lenders will normally come at a high cost.

Payday lenders charge high rates of interest

Because they are lending to people with poor credit ratings there is an increased risk that they will not be repaid. As such doorstep lenders and payday loan companies charge very high rates of interest.

It is normal to pay back at least 50% interest on any money borrowed and often these rates can be far higher. There are reports of rates increasing to over 3000% in some circumstances.

However, because the amounts borrowed are relatively small and repayments are broken down into weekly or monthly amounts, it is often easy to overlook the interest you are paying.

BMD Tip:  The amount you will be required to pay back to a doorstop or payday lender is normally made very clear. If you borrow £500 the repayment amount will be clearly stated (for example £750).

Taking credit from a Payday Lender is not a Debt solution

If you simply need a small amount of cash to cover an expensive purchase such as a holiday, and you cannot access credit elsewhere, a doorstep loan could be a sensible option.

However, if you are struggling financially getting a loan from a payday or a doorstep lender is not the answer. Although such a loan may make cash available in the short term, you must remember that it will have to be paid back.

If the only way to repay the loan is borrow more in a few weeks time, then your finances will just start to get worse and you will get deeper and deeper into debt. If you find you are getting into this situation, you should speak to a debt expert and considered a debt management solution such as a debt management plan or IVA.