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The start of a slippery slope: How some payday loans are resulting in further loans for consumers
There are fears that people who take out payday loans have to obtain further loans to cope with hefty interest payments that payday loans entail.
New reports have revealed that the majority of people who have taken out a payday loan struggle to keep up with the repayments of interest that are added to the outstanding debt when they get their payslip. Some payday companies are understood to have annual percentage rates of up to 2,000%.
There have been concerns that some consumers have been going into payday loans without knowing the implications of interest rates or simply did not pay attention when reading the fine print.
The reports are backed up by statistics which have revealed that additional loans taken out to finance payday loans occur in the next payment cycle in 87% of cases.
The lack of payday loan repayments could be pinpointed to the vast majority of a loan company's clientele. With many having a history of bad credit, their history of not being able to keep up with loan repayments rarely makes any exceptions with payday loans.
Paying off a payday loan as soon as possible is vital because of the astronomical interest rates. This is why many people have been taking out lower interest loans so they have the finance to write off the debt of the higher interest loan.
Some believe it is a start of a painful cycle that many struggle to shake off.
The concept and techniques of companies which offer payday loans have spread over from the US, where payday loan companies now are not doing as well as they used to.
Some companies have been banned from operating in various States and interest rates have been capped for bad credit score consumers who are loaning money. Lucky for consumers, this has meant less chance of debts spiralling out of control – however, it is understood that it is still very common for some US consumers to default.
One frequent payday loan user says that it is too easy to obtain loans and sometimes the temptation can just be too great, saying: "The payday loan company was saying come in, bring your evidence of who you are and where you live, your cheque book and your debit card, and we can give you the money there and then."
Consumer company Which? recently warned consumers that such loan companies were "bad news" and urged the public to consider other options like local credit unions instead.