Quick access loans can be a fast solution for residents of the UK in a difficult financial situation. They are offered to anyone with an income over a certain amount, deposited into your account almost instantaneously and are easily available.
The problems with the transaction arises when a customer is unable to meet the repayments in full, leading to high rates of accrued interest and large penalty charges, meaning even less chance of the customer managing the repayment the following month. Taking out multiple payday loans increases this risk hugely.
How the system works
When a customer cannot meet the repayments, it may be tempting to take out another one. Payday companies will not lend more than one loan to the same customer at once for the specific reason that the loans are small cash advances meant to get a customer through the month, and be paid back in full on their next payday. The customer should borrow exactly what they need, and with these quick fix loans going up to £1000 it should not be necessary to take out more than one. However, with there being so many different cash lender companies out there, and this number steadily increasing, it is easy to take out more than one in a month from a number of different companies. Payday loans companies do not run credit checks, or investigate your previous borrowings, so you will not run into any trouble when it comes to borrowing from more than one loan company.
Taking out more than one payday loan
However, the reason customers generally take out more than one loan at once is because they are unable to meet the repayments for their original loan. Paying off this loan with another payday loan may fix the problem in the short term, but will quickly lead to the vicious cycle of debt that may result in having to take extreme measures, such as bankruptcy. Customers that are unable to pay off one loan will clearly not be able to pay off two or more. You end up being able to pay off merely the interest on your loans every month, and never actually cutting into the original debt. With the interest accruing, inevitably the customer will be unable to even pay off that monthly amount.
In this situation debt consolidation may be the only way out. This can be done by taking out another personal consolidation loan, paying off all of your debts with this higher amount of money and then paying this loan off in one smaller monthly payment. Interest will be lower, and you will be able to pay off the loan over a long period of time, which is a longer term commitment, but the safest way of getting yourself out of a drastic financial deficit. If this is not available to you (for example if you already have a bad credit rating), it is always worth contacting the loan companies themselves, as they may offer you the chance to pay the loan back over a longer period, or in stages. This is at the lender’s discretion, but worthwhile action to take in a desperate situation.
It is not recommended that you ever take out more than one payday loan at a time. Only borrow as much as you need and pay the loan back within the terms set out in your original contract. For situations where you are struggling with debt in the long term, there are free advice services that you can contact, such as the Citizens Advice Bureau or the Consumer Credit Counseling Service, who will offer you advice on getting out of your difficult financial situation.
Banning payday loans altogether
Customers in this situation are already clearly not managing their money effectively, and are far more likely to default on their loans, or fall into a vicious circle of debt. Missing repayments means that the added interest and penalty charges can lead to a customer paying the total cost of their loan multiple times over, and in a situation where a customer could not afford to pay off the original balance in full in the first place – this just worsens an already sometime desperate situation.
Some cash advance companies are unregulated, not us! Meaning the consumer is not protected by the law, and allows the lenders to employ sometimes brutal tactics for getting their money back, leaving customers in severe emotional as well as financial stress.
Step forth the lobbyists
It is with this in mind that many lobbyists have called for quickie loans to be banned altogether. This has in turn led many in power; including MP’s and the credit advisers Consumer Focus, to warn that this would just lead to high risk customers being forced to turn to illegal loan sharks in order to obtain cash at short notice – a far more dangerous practice than borrowing from well known and regulated services. Consumer Focus have suggested a tightening of the rules surrounding payday loans, making them more difficult to obtain for customers with already quite serious debt problems, making the loans work more effectively and safeguarding the customers taking them out.
Among the rules suggested by Consumer Focus is a limit of 5 loans per household per year. Experts have already suggested that customers should seek financial advice if they need to take out more than three loans in any one year, so this advice would just mean companies would be required to direct customers to independent debt advisers should they reach their yearly limit.
Payday loans companies should also share information between them, preventing borrowers from taking out more than one loan at a time – one of the most easy ways to fall into a debt trap using cash loans. Payday lenders should perform more stringent checks on customers to ensure that they are able to make repayments in full on their next payday, meaning they will not be affected by the high APRs and devastating penalty charges which inevitably lead to the cycle of debt.
Payday loans do fill an essential gap in the financial market, and if used responsibly can be a helpful avenue for those with short term financial difficulties. If customers are aware of the situation they are putting themselves in, and are certain they can meet repayments in full on their next payday, there should be no call for payday loans to be banned. However, and there is always a however in most fair arguments, there should be tighter restrictions in place to make sure that vulnerable customers do not get themselves into a worse financial situation just through desperation.