If you've ever found yourself short
of cash and waiting on your next paycheque, you may have been tempted by one of
the many companies offering payday loans. But are they worth the risk?
A payday loan is a loan taken out to
cover expenses until your next payday, hence the name. The companies offering
them often tout their service as being quick and easy, creating the image of an
ideal way to get an advance on your wages, while carefully drawing attention
away from the potential pitfalls and risks involved in such a transaction.
A payday loan allows you to borrow a
certain sum and then pay it back, with a specific fee added on, when you get
paid. The fee takes the form of interest, and as such the amount increases the
more money you borrow. Of course, the other major disadvantage is that it adds
up over time, too.
The payday loan companies like to
insist that this is not a problem - after all, you're only borrowing the money
for a week or so, until you get paid. But for a good number of unfortunate
borrowers, the situation unfolds in a different and far less pleasant way.
Many people who end up in the
scenario where they desperately need money don't think too extensively about
the future, figuring they can cross that bridge when they come to it. But when
you set aside a chunk of your next paycheque to pay off your loan, you're
likely to be left short again at the end of the month - thus leading to what is
often referred to as the "payday loan trap" or the "payday loan
cycle".
The payday loan trap arises when you
end up dependent on these sorts of loans to be able to pay your way. You might,
for example, start off by borrowing £200 to keep you covered until you get
paid. When payday comes, you can expect to pay £50 on top of that in interest -
so you're £250 down before the month has even begun.
If your expenses are reasonably
consistent, that means that before long you will find yourself £250 short for
the month - and chances are that going back to the payday loan company will
seem to be the only option. But the £250 loan you need this time around
increases to over £300 when you add interest - which leaves you with even less
cash the following month. It may sound ridiculous, but a great many people's
finances end up trapped in a constant downward spiral due to payday loans.
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