Ideally, payday loans would be avoided altogether. But with many Scots resorting to them in a bid to ease financial pressures Sharon Bell, head of StepChange Debt Charity Scotland, shares her top tips on how to avoid being caught out.
DON’T DO IT
This is the simple answer. A payday loan may seem like an easy solution to a pressing problem, but watch out – they can carry interest rates well over 2,500 per cent APR (the annual interest rate). If you cannot repay it fast and in full, your debt problems can easily spiral. If you do manage to repay it, you may then not have enough to live on until next payday. Avoid thinking it would be sensible to take out another loan – you may become reliant on them and your situation will get worse.
Consider your alternatives. What about friends or family? Have you worked out a budget based on your income and what you spend each month? Can you make savings? Exactly how much unsecured debt do you have? Have you anything to sell? Can you boost your earnings? Are you receiving the correct benefits? Facing up to these details is a crucial part of understanding your finances. If you really feel there is no alternative to a payday loan, take a moment to talk it over with a free debt adviser before you do.
READ THE CONTRACT
Know what you are signing up for and understand that a payday loan is meant to be temporary. Unlike a short-term loan from a bank, it will accrue massive interest if you don’t repay it promptly. Also know that lenders will usually request you tick the box for continuous payment authority (CPA), giving them permission to take payments from your debit card bank account, even if the funds aren’t there. Make sure you agree the payment amount and how often it’s taken. If you can, use a direct debit, standing order or even opt to pay manually by cash or cheque.
If you can’t repay the loan on time you will be charged extra to extend it. Interest will also be charged until it is repaid. The lender will keep trying to take payments from your account, even if you’ve said you can’t afford it, and your bank is likely to charge you too if there isn’t enough money in your account. If you’ve agreed to pay by cheque and it bounces, you will be charged by your lender and your bank.
Get help quickly if you have debt worries. Almost half of those who ask StepChange for advice wait over a year between realising they have a problem and seeking help, while 35 per cent keep their problems secret from family and friends. No matter how serious your debt is, know that you are not unique and help is available free from StepChange Debt Charity by calling 0800 138 1111.
If you know that you can’t meet a repayment, cancel it before the lender takes it. This is trickier with CPAs than direct debits, but it can be done by contacting both the lender and your bank. If you are unsure how to go about it, use the template letter at www.moneyaware.co.uk
Once you’ve stopped the payday loan company from taking a payment you need to start thinking about alternative ways of paying the debt. A debt adviser can help by setting out a budget, showing what you can afford to pay towards your debts. They will also be able to give you advice on how to deal with them.
If you’ve not got the money to repay the loan in a lump sum the only remaining option is to pay back in instalments. Ultimately it’s down to the lender what it might accept, but if it knows you’ve had debt advice and you’re offering a reasonable amount based on your budget, there is a good chance of getting something agreed. If it agrees to accept lower payments it’ll usually – but not always – lower or freeze interest and charges.
ROLLOVER (AND OUT)
Think about it – “rolling over” the loan or taking out a new one means it will have to be big enough to cover the amount you originally borrowed, plus the interest of the first loan, and you will have new interest added on top. This can start a vicious cycle of snowballing problem debt. So STOP, and get free debt advice on your options.
SPEND WHAT YOU HAVE
Living without a budget is like walking around blindfolded – sooner or later you’ll hit a wall. The first step to reining in your spending is to write down your income and outgoings. But don’t be too hard on yourself if it seems too much – you’re now aware of what you’re spending and can take better control of it.