17 Jul / 2013
If your going to get a Payday loan, then if used responsibly, they are a great product, and can actually save you money if you are going to get charged for going overdrawn or get default charges, or they can get you out a short term financial fix, but if you use payday loans incorrectly, they can be very bad for your finances and your future credit rating.
So you are about to apply for a payday loan, and you have little or no intention of paying back the full amount of the loan at the end of the month on its due date. Please do not do it! It can get you into a lot of financial debt very, very quickly, and before you know it will spiral out of control. Why I hear you ask? This is due to the interest rate which is shown on most websites, also including ours, is around 1737% APR, but a lot of people tend to ignore this, and rightfully so as if you payback the loan on time the 1737% doesn‘t come into effect. This is due to the actual interest rate for the payday loan being around 25% for the term of the loan, usually never more than 31 days. Most people see the charges section, like on our website, and think they are only ever going to be charged 25% interest, so £25 for a £100 loan. £50 for a £200 loan and so on. This is actually accurate should you pay back the loan, including the interest, on the date agreed when you took out the loan.
However, Should you not pay your loan back on time, Firstly you will be hit with late charges and secondly with compounded interest. To work out compounded interest, you should work out the interest for the first period of 1 month, then add it to the total, then calculate the interest for the next period month 2 and so on and so on…. All the time adding interest to the total including interest not just the initial amount borrowed. This is very hard to explain in words so I’ll give you example in figures.
Let us take a simple £100 borrowed which gets charged 25% interest per month. In month 1 everything is going great and at the date agreed when you took out the loan you are due to pay your £125 back, which is your original £100 loan + your 25% interest which works out at £25. But you default on the loan and decide to try and roll it over to the next month, but when it comes to the end of month 2 you will owe £156.25, this due to the £125 from month 1 which you defaulted on + another 25% interest (£31.25). This is compounded interest.
So only 2 months down the line from when you originally took out the £100 loan, at the end of month 2 you now owe more than 50% interest of the original sum you borrowed, I‘m sure you will agree that’s pretty bad. It does however get worse, as the interest racks up and the amount you owe goes up, the monthly interest amount compared to your original loan increases massively.
Now lets look at month 3, you would now owe a total of £195, this is made up from £156.25 from month 2 (remember month 2?) + 25% of the total you now owe £39. Then in month 4 you would owe £243.75 which is the total of month 3 £195 + 25% of the total owed £48.75. This carries on until at the end of month 12 you owe £1452 from your original £100 loan. In reality you will actually be charged more as the lenders can and will add charges if you miss payments, but get this you will also be charged interest on the charges!!! That is how we get to the figure of 1737% APR. This is the amount you will end up paying and be in debt by if you fail to pay back your loan for a 12 month, a yearly interest, or Annual percentage rate (APR)
That is some pretty shocking reading isn’t it, but i only used as an example £100, lets take a look what would happen if I used the max payday loan amount of £1000, in 4 months of defaulting your £1000 loan you would owe £2437.50, and within a year of defaulting your £1000 payday loan you would owe a whopping £14520, that’s a huge £13520 of interest in a year on your original £1000 borrowed. As you can see you should only use a payday loan if you are confident you are going to be able to pay it back on the date agreed when you took the original loan out. And please, should you get into difficulty, contact your lender as quickly as possible, then try to come to an arrangement with them, the worse thing you can do is to leave it and try to ignore the debt.
You can contact piggypayday.co.uk if you are having difficulty and are unsure what to do and we will be happy to point you in the right direction. Even if you want to arrange a consolidation loan to pay off your payday loans we can help.
Obviously we are not against payday loans as we run a payday loan company, and believe we provide a genuine, necessary service, and that payday loans can actually get people out of financial difficulty and help them get back on their feet. But we need to better educate some people as to the pitfalls of taking out a payday loan, and how bad they can be if not used correctly. Should we be able to help one person not get into severe debt by them from reading this article then we will be very happy, but hopefully a lot more will benefit from reading this.
Payday loans are not all bad news, should you use them correctly and you pay the full loan back on the due date then you will only pay back the loan, plus interest, at the rate you have been quoted at around 25%, dependant on how many days you want it for. And should use a payday loan correctly then it can boost to your finances when you need it most.
I hope you enjoyed and benefit from reading it, please leave a comment below.
I personally would like to see a cap on the amount of times a payday loan can be rolled over to say around 3 months, what do you think?
17 Jul / 2013
Can payday loans save you money? In quite a lot of circumstances then yes they can, if used correctly. When payday loans are best used to save money, is to stop you going overdrawn, and to stop those bank/credit charges that can work out a lot more than taking out a payday loan.
Lets look at an example, you bank with the HSBC, it is getting towards the end of the month, things are tight and you think you won’t be able to pay all your bills, you have 2 insurance payments that you pay monthly for £28 and £32, these are with premium credit. You have a vanquish credit card and the minimum payment is £26. Now everything else you pay for is covered with money you have in your account.
So you are about to have 3 payments rejected for a total of £86, HSBC will charge you £25 for every payment it rejects over £25, so there is £75 in charges just from your bank, now you will be charged £20 by premium credit for every declined payment, so add another £40 for your two insurance payments, Vanquis will charge you £12 for a missed payment, so add another £12.
That’s a total of £127 in charges for not paying £86!!! Now if you get a £100 payday loan to cover your outgoings for that month at an average charge of £25 interest per £100 you borrow, you will be able to pay your bills on time, only get charged £25 interest, and save yourself £102 in charges! That’s right, I just showed a simple way that a payday loan can save you £102.
I bet you was surprised to read that, considering payday loans get such a terrible time in the press, yet we hear nothing about the extortionate charges that banks and credit companies charge for unauthorised overdrafts and missed payments. For example, did you know a lot of banks charge £6 a day on a £100 unauthorised overdraft and that works out to an equivalent interest rate of 2190% APR! That’s more than the average payday loan. Yet we hear nothing in our beloved press about this, but we hear a lot about payday loan companies.
Payday loans do get some seriously bad press, and sometimes rightly so when people are not paying back on time and rolling the loans over and getting themselves into a lot of debt. But is that the fault of the person taking the loan out or the payday lender? People must know what their financial situation is going to be in 1- 31 days and know what they are getting themselves into. Yes there are times when something unexpected happens, like a car breaks down or washing machine goes pop, and you have to rollover your loan till the next month. But you can’t tell me that happens to more than 40% of the people who take out a payday loan, which is the amount that rollover their loan. And yes the lenders are not entirely blameless either, they also put charges on to rollover, try to take money back when told not to etc.. but at the end of the day they are a business and here to make money, and there are a couple of lenders (not on our system by the way) that try and claw back money off people who havent actually taken out the loan but have been a victim of fraud.
I think we should be looking as a nation at the causes of having to take out a payday loan, not payday loans which are the solution to the cause. What would be the alternative if payday loans didn’t exist? Would so many people need payday loans if bank/credit companies charges where fairer? Would we be taking out payday loans if the bankers didn’t screw our economy causing a recession and lost jobs? If house prices where inline with historic prices and not extremely over valued would we be taking out payday loans?
Looking at the above and how much they can save you, is it right that they get such a bad press?
The resolution foundation has conducted research on rent prices in the UK and what it has found is quite staggering. It reveals that lower income families have been priced out of the rental market in around 1/3 of the UK! It also found that private rents are more expensive than a repayment mortgage in around 1/2 of the UK, but doesn’t go on to say at what interest rates and whether deposit is included. I imagine this is true at the best market mortgage rate available now, but maybe not at what interest rate would be offered a low income family with bad credit.
With wages stagnating and unlikely to rise in the next 5 years in line with inflation, we are probably going to reach breaking point if nothing is done soon, this is going to become a serious problem if more houses are not built for low – middle income families. And with these families being squeezed left, right and centre through inflation of food, petrol, energy etc… Then they are extremely unlikely to be able to save up for a deposit for their own home and escape the rent cycle.
The study uses this as an example, a couple with one child who have a net annual income of £22,000. The study goes on to estimate that the family in question would be using over 35 per cent of their disposable income on rent in 125 of the 376 local authorities in the UK. That’s astounding!
Even if their net income reached £28,000 they would still be priced out of 1 in 6 areas of the UK
“Behind these figures are families across the country being crushed by the cost of their home. We see families paying out so much of their income each month that they’re forced to choose between putting food on the table, turning on the heating or paying their rent.” Says Campbell Robb, chief executive of Shelter.
Housing waiting lists continue to grow whilst ore and more people are being priced out of home ownership this creates unsustainable pressure of private rents as greedy landlords push up their prices knowing that there is more demand than supply and people have no other option. Yet the government has announced that is going to reduce what it had planned to spend on affordable housing, are the government that out of touch with what is going on in this country?
We need more affordable housing now, and lots of it, the people in this country on low income need to be in a position where the can negotiate down private rent due to low demand rather than the other way round.