There are some people that fear that taking out loans could lead to a spiral of debt. This something which has been flagged up with reference to payday loans in particular but is there any reason why it should be the case? It is worth understanding more about the loans and also how borrowers can protect themselves form getting into further debt.
What is a payday loan?
A payday loan is a short-term loan, which usually consists of a few hundred pounds being lent to someone for a few weeks. The loans have been controversial as no credit check is done which means that anyone can borrow money, leading to some people saying that they take advantage of the most vulnerable borrowers. However, the lenders explain that the loans are designed to help out those people who have a financial emergency and cannot borrow money elsewhere. They can also be arranged very quickly which means that anyone that needs money quickly can take advantage.
The repayment is done via a direct debit which goes out on the day that you are paid, hence the name payday loan. This enables the borrower to have a much bigger chance of having the funds available to repay the loan. However, if the money is not repaid then there are charges, as they would be for any loan that was not repaid on time. As the repayment is normally a one-off payment, this can make it more difficult for some people to find the money that is needed. However, it can mean that the loan is cleared very quickly which can reduce any stress that is associated with borrowing. It is therefore very important to make sure that the loan is well planned. The borrower needs to be aware of exactly how much they will need to repay and when they will need to do this. They will also need to make sure that they will have enough money in order to meet the repayment when it is required.
How can it lead to further debt?
If someone has trouble with the loan repayment, they could be tempted to take out another pay day loan to get the money to cover the repayment. This will be expensive and they will then need to repay this loan instead. As the repayment on what they borrow will be higher than what they borrowed, because of the costs, they could end up taking out a higher loan, and this could escalate into them taking out higher and higher loans each month, until they can no longer borrow any more.
An alternative problem is where they manage to repay the loan, but that does not leave enough money to cover all of their other monthly expenses. This can again lead to them borrowing another loan and can lead to the problems as described above.
How can this situation be prevented?
In order to avoid this situation, it is important to plan carefully. The borrower will need to carefully look at their bank statements and note down how much money comes in and how much they need to pay for essentials. They will then need to work out whether after this, they will still have enough money left to cover the loan repayment. If they do not, then they need to find an alternative to taking out the loan.
Even if there is enough money, then there still is a danger of trouble coming. It is so important that a budget is set and stuck to, to make sure that there really is enough money to allow the borrower to manage to buy everything that they need before they next get paid. It can be really hard to stick to a budget, especially if there is a sale, something comes up that needs paying for or an unexpected bill arrives but this must be done to avoid having to borrow more money. It can be wise to perhaps try to reduce spending in some areas. For example, try to use the car less so you will not have to pay for so much petrol or shop at a cheaper supermarket and buy cheaper products. Keep in mind why you are doing this and remember that it only has to happen until you feel that you can easily manage your essentials again.
It can feel tough to have to budget like this. It is only short term though and it can be an important life lesson. If you can budget every month and perhaps even put some money in a savings account, then you may not need to borrow money in an emergency again. This should help you to have peace of mind.
So, although all loans can possibly lead to a spiral of debt this is not necessary. If you take on a loan having properly researched first so you know if you can cope, then you should not have to worry. You will need to work hard on your spending, but if you can follow a budget then this will really help you.