Should you get a payday loan? Nope. Here's why.
Payday lenders are now targetting students and will lend students money against their maintenance loan payments.
If you listened only to the adverts you'd be forgiven for thinking that payday loans companies were run entirely by rapping grandmas.
Wonga's employees pictured in their adverts, probably still working till this age because they took out a payday loan when they were 20 and it spiralled out of control.
Payday loans are not permanent solution to your money problems. Most the adverts (a lot of which break advertising rules) tell you that you'll receive money that day, and explain why you shouldn't be worried about their worryingly high rate of APR. But you should worry. They aren't even a temporary fix.
Fixing money problems with a payday loan is like plugging a hole in a dam with lit stick of dynamite. Temporarily you'll stop some of the water coming through, but some time very shortly you've massively increased your problems.
If you want the short read; never take a payday loan. There are plenty of alternatives, some of which we'll be outlining below, and payday loans should never be an answer to your money troubles.
Payday loans are only the answer to the question "what's the quickest way to send myself into a debt spiral that will inevitably lead towards my bankrupcy?"
Here is our guide to what payday loans are, and what alternatives there are out there during your time at university.
What is a payday loan?
In the words of a payday loans company a payday loan is a short-term lump of money that a company will pay to you on the understanding that you will pay them back when it hits payday, or, in the case of students, when your student loan instalment is paid.
They are an expensive way to borrow, and if you can't pay them back in full and on time, the costs can soon spiral out of control. They are typically quite an expensive way to borrow money and often have hidden fees or costs attached to them.
How do they say they make their money?
They claim they make their money by the small fees they charge for this service, or from a small amount of money made from a lot of clients paying small fees on their loans.
But how do they actually make their money?
The main way payday loans companies actually make their money is through charging extortionate amounts of APR on their loans, and charging extortionate fees for taking out money.
"There was one payday loan company that charged me £75 just for applying... we really struggled that month. Since payday loan regulations have got tighter I can no longer get wonga loans, this was a huge problem for us because we were trapped in this circle and couldn't lend any money to pay what we owed, that was when we had to decide to sell some things we own." - Anonymous student talking to Student Money Saver.
The large APR that payday lenders charge means that payday loans soon increase, so that borrowers end up paying a lot more than they originally took out.
What is APR?
APR is the annual percentage rate you'll pay on a loan you take out. A typical rate for a personal loan is between 3 and 15%. A typical rate for a payday loan is between 850% APR and 1200%, though they can be higher. This means that if you took out a loan of £100 and couldn't pay it back, at this rate the loan would grow to £1200 within a year at a rate of 1200%.
Payday loans will typically end up charging more for a month than credit cards will for a year on the same loan, by charging fees as well as APR.
A £100 loan, for example would typically have a fee of £20-30, so if you repaid your loan on the day it's due you would have to repay £120/130. If you had taken this same amount on a credit card at a standard credit card rate of APR (of around 20%) it would be a whole year before you owed £120, rather than one month.
Can you take one out as a student?
Payday lenders have begun targeting students, with some lenders targeting students specifically. If you google "loans for students" the vast majority of the paid for results will be payday lenders who are targeting the student market.
They will lend you money on the understanding that you will pay them back when you get your loan instalment.
"We have taken out a number of wonga and smartpig loans. I regret it because I feel like I'm now in a vicious circle that I'll never be able to escape from." - Anonymous student talking to Student Money Saver
But just because you can take out payday loans doesn't mean you should. Even if you pay it back on time you'll pay a lot for the service, and if you fail to make a payment (e.g. if your loan was paid to you late, or you had an unexpected bill to pay) they can quickly escalate out of control.
Are some of them better than others?
Linda Isted, of the Debt Advice Foundation told us:
"It really isn’t a good idea to characterise any payday lender as “good” or “bad”.They all charge huge rates of interest, some much higher than others, and they are all aggressive (some very aggressive indeed) in their methods of trying to lend even more money to anyone who has given them their contact details, or the tactics they use to chase people who have fallen behind on their payments."
Will they affect my credit rating?
Yes. Taking out a payday loan can affect your credit rating, meaning it will be harder for you to take out legitimate loans or mortgages in the future.
Are they ever worth the risk?
No. A lot of people taking out payday loans think the risks don't apply to them, because they fully intend to repay the loan the moment it comes round to payday. But this is precisely who the loans companies get their money from: well meaning people who hit hard circumstances and are unable to pay the money back immediately (e.g. if they were hit with an unexpected gas or phone bill, and were'nt able to pay back the full amount). You'll also find that once you take one out, they'll try to seduce you again with discounted fees as they will see you as a "good" customer - one who will pay even bigger fees to them in the future.
What to do if you've already taken out a payday loan
Pay back the money as soon as possible
The best thing you can do if you have taken out a payday loan is to pay back that loan - in full - at your earliest opportunity. The longer you leave it, the more your debt will grow and the bigger problems you'll face down the line.
Never borrow more money to get yourself out of it.
This can lead to a "debt spiral" where you borrow money to pay off another loan (and so on) whilst your loan keeps getting bigger.
If you have taken out a payday loan and are worried about whether you can pay it back, you should seek advice from someone who can advise you, based on your finances specifically.
Who can I speak to about money problems?
There are plenty of people to talk to out there about your money problems.
It sounds obvious, and we know it's embarrassing to admit to your parents you have money problems, but if you are desperate enough to be considering a payday loan you should talk to your parents. They've likely been through money troubles themselves, and it's nothing to be embarassed about having money troubles when rent is as high as it is for students.
The Citizen's Advice Bureau offers impartial advice on all kinds of issues, including debt advice and legal aid. You can contact them online or find your nearest Citizen's Advice Bureau here.
Your uni will have a student finance section dedicated to helping students with financial difficulties (as well as the admin of getting everyone their loans etc). They can usually be found in the main administrative building, or their contact listed on internal University web pages. If you can't find them this way, head to student reception and they will point you in the right direction.
They have funds specifically for students in dire financial circumstances. They may give you a zero interest "hardship loan" to tide you over until your next student loan instalment, or they could even give you this money with the understanding that you don't have to pay it back.
Your student union
Most student unions have a welfare officer who will help you with financial difficulty. If you can't face going straight to your university, head to your welfare officer for some more informal advice.