It can be difficult to make ends meet, particularly with bills on the rise and incomes being squeezed. But, that doesn't mean you should resort to payday loans. They've come under serious scrutiny in recent months, largely thanks to their sky-high interest rates and the potential to trap people in a cycle of debt, so it's vital you understand the risks involved.
Payday lenders themselves need to do more to educate people about those risks, says Citizens Advice, after research found that one in five payday customers were unaware of the risks of extending the loan – something that the lender had failed to alert them to.
The Payday Loan Tracker Survey also found that just one in five of those struggling to repay their loan had the interest frozen, and only a quarter felt that the lender treated them sympathetically. This is despite the fact that the industry has been under enormous pressure to clean up its act and had made promises to do so, with the survey highlighting how slow lenders have been to improve their practices.
Gillian Guy, chief executive of Citizens Advice, commented: "Payday lenders are still not sticking to their word to treat people fairly. While things are moving in the right direction, some payday lenders are still falling far short of responsible lending.
"Customers need to have the full facts at their fingertips when making decisions about borrowing. Irresponsible behaviour, including a lack of proper checks to see if people can afford to pay back loans and pressurising borrowers into extending loans, has pushed people deep into debt."
The study noted that some lenders have made slight improvements, particularly when it comes to asking people about their personal finances (half of customers are now reporting that this the case, compared with a third previously), but there's clearly still a long way to go.
It's hoped that the new rules brought in earlier this year will go further to drive improvements in the industry. Payday lenders and other providers of consumer credit came under Financial Conduct Authority (FCA) regulations in April, and today – Wednesday 1 October – marks the end of the 'grace' period given to providers to enable them to adapt to the new rules. Some lenders have already ceased trading as a result of these rules and early action from the FCA, and it's hoped that more will improve their practices to avoid tougher action.
"The new rules should contribute towards ridding the market of irresponsible lenders, but this won't be achieved by regulation alone," added Gillian Guy. "The FCA needs to use enforcement action make sure firms flouting the rules are not allowed to operate.
"As people continue to struggle to make ends meet, the demand for short-term credit won't go away. That's why, as well as a cleaner market, people need more choice. Increasing the number of credit unions is part of that, but so too is banks stepping up to the plate by offering a responsible micro-loan."
Given that one in eight people with serious debt problems have a payday loan, with average payday debt totalling £1,000, it's clear that these alternatives are necessary. Educating people about the risks involved with this form of lending should be a top priority for the industry, but so should offering alternatives, thereby creating a well-rounded solution that can help those in need of short-term credit.
If you don't have access to credit unions or micro-loans, what about a traditional one? They may be harder to come by as they have stricter affordability checks than the payday variety, but they should always be considered before seeking payday lenders. Credit cards that have been specifically designed to rebuild credit ratings could also be an option – they'll come with higher rates than the usual cards, but because they're designed for credit-impaired customers, they could be the ideal first step to regaining a solid financial footing and could improve your credit rating for future needs.
Whatever route you choose to go down, make sure you remember one thing: steer clear of payday lenders! The risks will invariably fail to outweigh the rewards – they come with interest rates that are upwards of 5,000% APR, and if you can't pay the loan off in time or need to extend it, the amount you'll repay will increase considerably. There'd be nothing worse than being stuck in a cycle of debt, so always consider your options first.
Read more about Payday Loans with our Guide to Payday Loans
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