Since the credit crunch began, an estimated three million have used a payday loan to access money quickly. For some it's a perfect solution. Used properly such a short term loan may provide immediate access to finance to solve a short term cash flow problem. If the amount borrowed really can be repaid in full on the next payday then all may be well. But of course there are huge risks.
Pay day loans are what they say on the can - a loan until pay day. Failure to repay the loan will result in very high interest rates that can work out at thousands of % per annum. The rates charged are now subject to investigation but demands for regulation are growing. However many thousands of people are locked into exorbitant interest rates.
When a debtor is unable to repay the full loan, the usual process is to borrow again and escalate the debt. This can often be done by the short term lender but the new amount borrowed is impossible to find. As short term lenders usually have access to the debtors' bank details, pay day turns into a nightmare as the amount owed is automatically drawn by the lender. This means the debtor may have little or no income to pay for household essentials. The only solution is further borrowing.
Of course there is a short term solution on hand. It's another payday loan company. We can borrow from the second to pay off the first and we've bought ourselves another month. No financial expertise is needed to see where this is heading. Before long the debtor has a string of short term lenders each making life very difficult. Come next payday, if there are insufficient funds to meet these obligations, then aggressive communications and action will follow.
Debtors faced with loans they cannot repay, need to take certain action. Income necessary for priority may need to be ring fenced. This could involve opening a new bank account so income that goes into it is protected. Then, creditors do need to know what's happening. A debtor cannot be forced to pay what they don't have but they do need to take steps to resolve the problem. At this point the debtor does need to explore all the options open to them, including bankruptcy, an IVA or a Debt Management Plan.