Payday Loans Bring More Than Just Short-term Credit

10/13/2011 9:09 AM EST

As household budgets continue to shrink and the cost of living soars, a North East debt advice expert is urging people not to rely on payday loans to cover monthly bills.

The stark warning from Liz Chadwick, Chief Executive of DAWN Advice, comes as it was revealed by Citizens Advice that the number of people facing financial difficulties as a result of payday loans has quadrupled in the past two years.

Chadwick said that the ‘so-called’ advantages of many readily-available payday loans, including no credit checks, instant approvals and payments banked within hours of application, can often lure people in without them really considering the bigger picture.

She said: “Short-term credit may often appear like the easiest and simplest solution to cover bills – almost like a quick fix – but it is frequently just a case of papering over the cracks. If repayment deadlines are missed and debts roll over, the unsettled interest can quickly grow, often spiralling out of control.”

Payday loans are designed to help borrowers make ends meet until they receive their next pay cheque, however many find themselves in difficulties, as without careful management, borrowers can become trapped in a cycle which sees them regularly relying on the loans.

Chadwick added: “Payday loans are often linked with exorbitant Annual Percentage Rates (APRs) with some lenders charging interest rates upwards of 4,000 per cent. Although the loans are not intended to provide credit for anywhere near a full year, it is a dangerous cycle which is difficult to break.

“We are mid-month now and given the current economic climate the probability that people will be starting to feel the strain as they struggle to make their pay cheques stretch to the end of the month is extremely high. However, I would advise anyone thinking of taking out a payday loan to stop and seriously consider their decision first.

“If a borrower takes on, then pays back, a short-term loan at the end of one month, they will almost certainly need it at the end of the next month, too. Every time incurring costs and in all likelihood, slipping further into debt.

“So many of the region’s households are really feeling the pinch at the moment with official figures reporting that between June and August 142,000 people in the north east were without a job – creating a 19-year unemployment high.

“Those who are struggling and are regularly relying on this type of borrowing are actually masking their problems and are potentially pushing themselves further and further into financial crisis. Instead they should be seeking independent financial advice to prevent their debts from escalating.”

Anyone who is facing financial hardship or concerned about matters relating to debt should contact Community Legal Advice for free and impartial advice on 0845 345 4 345.