Our first and over-riding piece of advice is that in all but a very select series of circumstances Payday Loans are not a cost effective option of borrowing money. You may be aware of some negative publicity however let’s recap some of the potential downsides to this form of emergency lending:
1) The interest rate – Payday Loans are sold as short term (i.e. usually no more than a month) borrowing, and as such their interest rates are extremely high. For example if a loan is not fully repaid within the initial agreed period it could attract interest in excess of 5000% APR (how much over and above the initial loans you’d have to repay over the course of a year). So borrow £100 and you could end up having to repay £5000 - and that’s without missed repayment charges.
2) Debt collection – Payday lenders rightly or wrongly have a bad reputation for their debt recovery methods. If you are struggling financially and end up taking out a loan you can’t afford to repay the last thing you probably want to add to the mix is a debt collection agency pursuing you, potentially in an aggressive legal manner.
3) Credit rating – Whilst your credit rating is unlikely to be at the forefront of your mind it is something that could be pivotal in later life, such if you ever wish to apply for a mortgage. Bad credit ratings can even interfere with something as simple as mobile phone contracts. Because of the high interest rates and forceful debt collection methods associated with Payday loan companies there is a much higher likelihood that borrowers will incur negative credit scoring (lowering their chances of future borrowing from more mainstream lenders like banks) than if they borrowed from other legal lenders.
There are other options available and we’re not talking about unlicensed lending (aka loan sharks –which we hope it goes without saying you should avoid at all costs.) A specific type of community based social enterprise has been around for a number of years to offer banking and loan based services to individuals who cannot access them through other means. These are Credit Unions.
Credit Unions are community based financial co-operatives owned and controlled by its members. Each Credit Union is run only to benefit its members, all of whom share the common bond, which is a factor that unites every Credit Union member. It is what every member of a particular Credit Union has in common, for example is it often living or working in a particular locality. A Credit Union is different because it is not owned by any one person, organisation or group of shareholders. Instead, each Credit Union is owned by its members, and each member has an equal say in the running of their Credit Union.
As a ‘not-for-profit’ organisation, members’ savings are used to fund loans to members at reasonable rates of interest. Similarly, the interest charged on loans is used to fund a return (or dividend) on members’ savings. In particular Credit Unions’ are usually open to people who have poor credit history or who are unable to access banking services or loans from high street banks.
Loans are usually available, and unlike the interest rates offered by Payday lenders (usually in the 100’s of % APR and often in the 1,000’s) Credit Union interest rates on loans are likely to be a much more reasonable 20-30% APR. Credit Unions’ sometimes also have skilled debt advice and a remit to support their members’ journey to a better state of financial wellbeing.
Credit Unions local to our main campuses can be found below, you should check them out for yourself though and make a decision as to whether the services they offer suit your needs.
Morecambe Bay Credit Union: www.mbcu.co.uk
Carlisle and District Credit Union: www.carlislecu.com
London Community Credit Union: londoncu.co.uk
- Explore Credit Unions as an option
- Seek debt advice through the Citizens Advice Bureau
- Book an appointment with a Student Money Adviser regarding financial emergency