Why pay day loans suck

It can be hard to make your money last until the next pay day, but don't be lured in by these rip-off loans...

If there's one thing that really gets on my nerves about commuting to work by train (aside from being herded into the carriage like cattle and being stuck under someone's armpit for the duration of the journey), it's the number of adverts I see for payday loans.

Payday loans effectively offer you your pay cheque a few weeks early. Usually the adverts will contain words such as 'fast', 'convenient', 'easy', 'bad credit OK' - and thus make payday loans sound like a pretty fantastic way to get your hands on some much-needed cash.  

And at a time when many of us have overspent at Christmas and are now struggling with a stack of debt, payday loans can sound even more tempting.

But while this is understandable, payday loans should be avoided at all costs.

What you need to know

Payday loans are cash advances on the salary you're expecting at the end of the month. Typically, you can borrow up to £1,000, although several lenders only allow you to borrow a maximum of £750.

Applying for a payday loan is easy. It only takes a couple of minutes, and the cash will usually be transferred to your bank account the same day - sometimes even within an hour of your application being processed. So it can be a great temptation for anyone needing to get their hands on some cash fast.

What's more, no credit checks will be carried out - so if you've had trouble getting credit in the past, payday loans can seem very attractive. All you need to do to qualify is be 18 years of age or older and hold a bank account that receives regular payments from an employer. If this applies to you, you'll find payday loan providers champing at the bit to lend you cash.

When it comes to repaying the loan, most lenders will simply deduct the owed amount from your account on the date of your next payday. Simple.

Don't fall into the trap

If you are struggling with money at the moment, it's understandable that payday loans might sound like an easy solution to your cash troubles. But, please, don't fall into the trap. Payday loans are riddled with catches.

For a start, if you do take out a payday loan, you'll be hit by an astronomically high rate of interest. Typically, for every £100 you borrow, you'll be charged a fee of £25. So if you decided to borrow £600, the total amount repayable would be £750! Ouch. To put it another way, that's an interest rate of 25% for just one month - and equivalent to an APR of 1,737%!

Of course, you could argue that this is an extreme way of looking at payday loans - after all, they are designed to extend over a matter of weeks, not years. But I still think this is a very expensive way to borrow - particularly when you consider that many personal loans have typical APRs of under 8%!

But another issue with payday loans is that it can be so easy to simply roll your loan over for a second month. So even if you initially plan to pay back the loan within the first month, you might decide to give yourself some extra breathing space, and extend the loan for a second month.

However, if you do decide to do this, you'll have to pay back the original interest on the original due date, and you'll then be charged extra interest for the next month. These fees can soon stack up and you could find yourself plummeting further into debt, and desperate to borrow even more money.

Better solutions

In my view, payday loans are just a way of making people who already have debt problems fall even further into debt. And it's this that makes me really mad when I constantly find myself staring at an advert for payday loans.

But if you are struggling with your finances, there are far better solutions.

Firstly, you could consider taking out a personal loan. As I said earlier, you could be looking at typical APRs of 8% - so this is a much better option. That said, it's unlikely you'll get such a competitive rate of interest if you want to borrow a small sum of money or have a bad credit rating - if you're looking to borrow just £1,000, you could be hit with an interest rate of around 18.9%. However, this is still lower than the APR offered by a payday loan.

Alternatively, if you have built up a lot of debt over the Christmas period and have a hefty credit card bill to pay off, it's a good idea to transfer that debt to a 0% balance transfer deal right away. This will give you some breathing space and give you a chance to tackle your debts head on.

The Virgin Credit Card, for example, offers a fantastic 16 month interest-free period. And as well as paying off a credit card or store card debt, you can also use this card to transfer money directly into your bank account to pay off an expensive overdraft or personal loan.

Just bear in mind you'll have to pay a transfer fee of 4% for this money transfer, and 2.98% for the card balance transfer.

Unfortunately, you're unlikely to be accepted for this card if your credit record isn't blemish-free. If you've had problems getting credit in the past, the first thing you should do is check your credit report, just in case there are any errors on there which you can get corrected. If it's accurate but you're having problems, consider applying for a card like the Capital One Bank Classic Visa. It's got a very high APR - 34.9% - but it's still better than a pay day loan, and it's specially designed for people with a history of bad credit. Just make sure you prioritise paying it off using the snowball method, or you will face a hefty interest bill.

Finally, you could consider borrowing from Zopa, a social lending site. This clever business allows you to borrow from other people, instead of your bank. However, you will still need a good credit rating to qualify for a loan. Watch our video on Zopa to find out more.

Get out of debt

If you are in mountains of debt and want to regain control of your finances, the first thing to do is to register on lovemoney.com (if you haven't already) and adopt this goal: Destroy your debt. Next, watch this video on debt advice and this one on debt rip-offs. And then, why not have a wander over to Q&A and ask other lovemoney.com members for advice?

Finally, if you're still feeling confused, don't forget that there are people out there who can help. So why not contact a free independent debt advisory service such as Citizens Advice, National Debtline, or the Consumer Credit Counselling Service? You can read more about all of these in Get out of debt with free advice.

But whatever you do, don't think payday loans are the answer to your money troubles. They might sound like an easy way to solve your cash requirements, but in fact, they could just lead you further into debt.

More: The top 10 warning signs of debt | Six dangerous ways to borrow