Payday loans are dangerous.
They’re in the same basket as betting bookies, gambling and MLM schemes = money out the window. However, in order to really understand why, it’s important to know what they’re all about, hence this amazing WTF blog post to educate you. Payday loan companies usually prey on the low-income workers (which includes us students) so you want to have your eyes and ears open and make sure you don’t get caught in a trap- it can get pretty nasty.
Here’s what we’ll be covering:
- What are they?
- How do they work?
- Why are they dangerous?
- Alternatives
1. What are they?
A payday loan is basically a short-term loan that you get from a business and not a bank. They’re very expensive, some with APRs of up to 1,500% instead of 22.8% for a normal credit card. The point is that you borrow a small amount, usually nothing higher than £1,000 and pay it back with interest at the end of the month, or whenever you get paid during the month.
This means if you borrow something like £500, you could be paying something like £625 or more back.
This can be appealing to students who are having difficulty making ends meet every month. But then they may think ‘Oh I just need to borrow a couple hundred pounds’ and next thing you know they’re in debt and having to pay that back each month. Not so fun.
2. How do they work?
It’s pretty simple: you sign up to a payday loan platform, they do ‘checks’ on you and then you receive the amount in your bank account. They then ask you to set up a recurring payment every month to make sure you pay back your debt: risky, because the money disappears pretty easily and quickly and it’s good luck getting it back.
The scary part: there’s a lot of fees. The interest rate, the late fee, the rollover fee, etc. They appear out of nowhere and just add to your bill. Which is why it’s easy to end up paying back hundreds unknowingly.
3. Why are they dangerous?
The danger: you can very easily get stuck in a debt cycle. The customer starts relying on payday loans every month and then starts taking out more and more from other companies to cover the original ones. And then bam: catastrophe.
People believe this short term loan might fix the problem, but then next month they need to pay their bills as well as pay back the loan. And if that doesn’t work out, they then need to pay late fees, rollover fees and more interest. Ahhhh!! Next thing you know the person is taking out another payday loan from a different business to cover their payments to other loans. This is a vicious debt cycle, and one you really don’t want to get into (and it’s not just with payday loans)
And yes, you may say: But if I repay it all on time then I should be ok, right?
Well, well, let me introduce you to Scott Tucker: a racing driver who managed a payday loan business. He was a millionaire. You know why? The small print in the Terms and Conditions. People would borrow $100 and then end up repaying back 7 times that amount. All because of these hidden fees and dodgy contract terms. He did end up in jail and all his cars were taken from him, but it really shows you how easy these companies can take advantage of their customers. Creepy af.
The FCA in the UK has tightened the rules such as limiting the times a loan can be rolled over, stopping lenders from collecting a payment more than twice and adding risk warnings. And yet I am sure there are some people who still get ripped off somehow. I would stay away.
4. Alternatives
If you ever find yourself struggling to make ends meet at the end of the month, I strongly advise against using a payday loan. The fastest option as a student is to get a credit card (check out the guide to credit cards), and from there you can ease off and make sure to pay it back each month. Do some hustling, work your ass off and make sure to not get into debt. It’s called consumer debt for a reason: it’s a trap and it’s expensive.
And once your difficult month is over, focus on building an emergency fund and budgeting properly. You never want to get used to getting into debt - it can go downhill veeery quickly.
Yes, I know we’re adults and you have the choice to do what you want with your money and whether to take out a loan or not. And yes, you’re allowed to make mistakes and learn from them - that’s what financial education is all about. I do say steer clear from payday loans, but I also say do your research and be very careful. Oh and watch the documentary on Scott Tucker - that will definitely put you off payday loans forever!
