Pay Day Pitfalls

"Our company helps clients get rid of personal debt. Typically we were dealing with people experiencing problems with credit cards, mortgages, student debts and so on, but then we noticed a steady increase in the number of clients coming to us with bad debt with issues stemming from Pay Day loans. The level of interest on a Pay Day loan can range from very high to mind-bogglingly gargantuan – annual rates can be as much as a staggering 2000%"

In June 2008, The Times reported that the number of Pay Day loans taken out in the UK had more than doubled in the previous twelve months. Since then the cost of living has been constantly rising. With widespread wage freezes and a large proportion of workers facing either pay cuts or redundancy, It's no wonder that easily obtainable loans are increasing in popularity, despite coming at a heavy cost.
 
Rebecca, an Office Manager from Plymouth, ended up in serious financial difficulty after taking out one of these loans. I was shocked when she told me how much debt she'd ended up in, and in so little time. She says:
"In January last year my best friend died, and I had to go to Australia for the funeral. After all the Christmas and New Year spending, my finances were in worse shape than usual.  After paying all my usual bills and expenses, I simply didn't have enough money for the ticket. The bank wouldn't extend my overdraft  and I couldn't wait a week or so for them to approve and process a personal loan. I'd often walked past a small shop in the city centre  offering cash advances, so I went in, and in about five minutes had arranged a loan of £500. They wanted £100 in fees, which I thought was awfully steep, but I felt it was the only way I could get the money at short notice. I wrote them six cheques for £100,(the maximum guaranteed by my cheque card) post dated for the following pay day. I knew it'd be tight next month but I figured that if I stuck to packed lunches when I got back, I should be OK. Ten minutes later I was in the travel agent's office, buying a ticket with cash."

After she returned from the funeral, things went from bad to worse. A couple of days later Rebecca was involved in a minor car accident. Fortunately nobody was seriously hurt, but since she only had third-party insurance, the extensive repairs to her car had to be paid for out of her own pocket.

"When I told them I couldn't afford to pay that month, they charged me another £100 to 'roll over'. The next month I found myself having to pay them another hundred. By the time I had paid that, I still couldn't meet the original amount, so had to pay another 'rollover' charge. A third month went by, another £100 in interest, and of course each time I was even less able to repay the amount I had originally borrowed. The fourth month came, and due to an oversight, I missed the repayment deadline. They instantly cashed the original cheques. Of course, the bank honoured them since they were guaranteed. I ended up well over my overdraft limit, incurring a £39 fee on each cheque and with a black mark against my name for unauthorised borrowing."

Rebecca's £500 loan had cost her dearly. £500 in interest, £500 debt to the bank and another £200 or so in charges., not to mention the damage to her already mediocre credit rating.

"Soon I was within an inch of having a nervous breakdown. I'd been struggling to keep my head above water financially for some months, and was still grieving, so this totally broke me. I couldn't sleep, had no appetite and started making potentially serious mistakes at work, Because I was already in trouble I just thought 'it can't get any worse' and buried my head in the sand. I didn't bother paying any bills for around six months. Debt collectors were leaving me messages at work and I was scared to answer my own front door in case bailiffs barged in to take away all my things. I'd hit rock bottom and couldn't see myself ever being solvent again. The whole experience left me with a deep distrust of all financial companies, and if it wasn't for a positive referral from a relative, I'd never have thought about setting up a Debt Management Plan with a private firm."

Rebecca's case is not unusual. As the UK economy slides ever deeper into recession, individual borrowing power decreases and the banks are more likely to refuse loans. This means more hapless consumers are pushed further into debt by these maverick lenders, who essentially force the banks into lending to people they may already have deemed a bad risk. The days may be numbered, however, for this type of loan.

In today's digital world, money moves around quickly. If retailers wait for cheques to clear they lose out on the benefits of being able to use it instantly. Many have stopped accepting cheques altogether, and many major European banks no longer give out cheque books,  issuing them at a cost and only on request.
Whilst many would argue that lending cash in this manner to those already in financial difficulties is at the very least deeply irresponsible if not totally unethical, the existence of such lenders can be justified by those who can truly afford the inflated price of the service. In some cases the speed and convenience makes paying over the odds for credit worthwhile, especially if the borrower is time-constrained, making an entrepreneurial purchase or is perhaps solvent but perceived as a credit risk due to previous debt issues.

In the majority of these cases, these Pay Day loans are generally the worst way in which to borrow money. As Rebecca's case shows, unexpected happenings can mean things quickly spiral out of control. Prospective borrowers should research all possible alternatives, and should they find none, they must be absolutely sure they are able to meet the payment in the time agreed should such circumstances arise.