It's the middle of the month and your boiler breaks down. It's snowing outside and you have no hot water or heating.
The kids are freezing and your wife's turning blue.
Payday is two weeks a away still but you have to get that boiler fixed A.S.A.P. What do you do?
Should you consider a payday loan?
With an easy application process, and cash available in your account within the hour, (they often quote 10 minutes), payday loans can seem like a godsend when you really need the money.
Of course the catch is the "one off" interest charge, but surely they're good for getting you out of a hole? And the interest charge, typically around £25 per £100 borrowed, is something most people can live, especially with when it comes out of their pay packet before they can spend the money??
Well no, not really.
Taking the case above, I'm going to assume that ALL other options are exhausted. There's no room on the credit card, no family members who can lend a hand, and so on, so let's follow it to it's logical conclusion.
You'll notice the family don't have enough cash left to pay whatever amount it is to get the boiler sorted. So they borrow the money, and get it fixed. However, come the next payday, that money (plus the interest charge) is now due and will be taken from their wage, effectively leaving them in a slightly worse situation than before, except they now have a working boiler.
They are still short of the same amount of cash PLUS they are also, the "one off interest charge" amount down, so they don't have enough to get them to the end of the month ahead...
And this is why payday loan companies often "offer" to extend the loan for a month, at the cost of yet another "one off" interest charge. Effectively, the money is becoming a longer term loan so now it's increasingly important to look at the interest rate, and it doesn't make for nice reading. A £25 fee per £100, is 25% for the month. Over a year, that rate (also known as the APR) is much, much larger than 25% because you're paying that each and every month.
As you can see, the whole thing becomes circular and can very, very easily spiral out of control, while the interest charges start mounting up to more serious amounts.
I've mentioned in other posts on this blog, that the family should have an emergency slush fund precisely for these occasions. In this case, I've assumed they haven't got that for whatever reason - perhaps they haven't started one yet, but it does show the importance of having one.
But if there are no other options, what choice does a family have?
Well, to put it bluntly, they have 2 choices:
- Freeze and smell bad for a fortnight
- Get into un-manageable debt
I'm sure you don't fancy either option, but when it comes down to it - the colder option is always best.
Sew the kids into their bedclothes if you have to, and keep them as warm as you can with extra layers and hot water bottles. Wash them in the sink, or send them to school with a bar of soap in their bag to use in the school's changing facilities - basically do anything instead of that payday loan.
It may seem cold hearted, but only a moment's thought is required to see that a payday loan will cause far more financial pain, stress and suffering than the cold weather will, and will take far longer to deal with too.
If you're in a similar situation, I would encourage you to look for any other solution first. Don't forget, there's always welfare and charity. In the UK, emergency loans for this sort of thing are available from Social Services. Then there's always neighbours who might let you use their bath a couple of times a week.
Either way, payday loans are financial vampires and if you're not well off, they can quickly destroy what little you do have, so my advice - avoid like the plague...