We all know the perils of payday loans, yet it seems that many are still drawn to them. Even worse, it isn't always for frivolous spending, either – research from Debt Advisory Centre (DAC) has revealed that a worrying proportion of payday borrowers are using the money to pay for essentials, highlighting how much the cost of living is taking its toll.
The figures show that, of the 7% of respondents who have taken out a payday loan in the last 12 months, 44% did so to pay for everyday essentials, such as food and travel costs. A further 35% used the money to cover rent or mortgage payments, 22% used it to pay other bills, and 13% used it for a one-off emergency, such as boiler repairs.
This not only highlights the pressure a lot of household budgets are under, but also suggests a lack of suitable savings – particularly when emergencies need to be paid for by a loan. It would seem that payday loans are largely used as a last resort when borrowers' income just doesn't stretch far enough, and although some borrowers use the cash to treat themselves (5%), for a holiday (20%) or to buy the kids' birthday or Christmas presents (12%), many are simply struggling with everyday costs.
Another notable statistic is the fact that 18% used the money to pay off other unsecured debt. Arguably, this is a tactic that should never be employed – payday loans are one of the most expensive forms of credit available, so chances are, you'll be worse off making these repayments than if you stuck with your original debt.
Ian Williams, spokesman for DAC, says: "Many people who are struggling with money problems often put off tackling them – for example, believing that if they can just borrow some money to get through this month, then things will be better next month. However, for a great many people that simply isn't true: if you have got to the stage where you need to borrow money to buy food or pay the rent, a loan isn't the solution – it is time to seek expert help with you finances."
Really, a payday loan should be avoided at all costs. The sky-high interest payments and the possibility of being stuck in a cycle of debt could have a serious impact on your finances, and it could affect you in the long term, too, as some mortgage providers won't accept applicants that have taken a payday loan in the past.
Ideally, you'll want to get to a point where you don't need a loan to cover the essentials, perhaps by taking a look at your budget to curb any unnecessary spending. Having a savings account that's solely dedicated to building up an emergency fund could mean you don't need to turn to payday lenders when the boiler breaks, and if you're worried about being able to cover the cost of Christmas, start saving now – yes, now! – and you could find it a lot easier to cope with in a few months' time.
If you really need to borrow money, however, head to reputable providers first. Choosing a personal loan will be far cheaper than a payday variety, and there are even some lenders that have products designed for credit-impaired applicants if your credit history isn't quite up to scratch. If you're still struggling, seek help – talk to current creditors if you can't make minimum repayments, and if your money isn't going far enough each month to cover the essentials, get advice. Citizens Advice or the Debt Advisory Centre could be great places to start, and hopefully you won't need to resort to loans of the payday variety.
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