Will a Payday Loan Lead to a Spiral of Debt?

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.

Are Payday Loans Hard to Repay?

It is worth thinking about how you will manage a loan when you take one out. Sometimes borrowers will get so taken over by thoughts about what they will do with the money they get form the loan, that they forget about their responsibilities and that they will have to repay it. It is good to find out about the repayment(s) so that you can work out whether the loan will be hard for you to repay or not.

How payday loan repayments work

Payday loans are different to other loans such as quick loans because they mainly have just the one repayment. This usually is taken out on the day that you are paid by direct debit. This means that you will not forget to pay it, but you have to make sure that there is enough money available in the account to pay it or else you will be charged. The repayment is set up so that it falls on your pay day which means that there is a lot more of a chance that there will be enough money available to repay it. This should make them easy to repay, but there are still people that struggle. It might be that they are not paid at the start of the day and the repayment is taken out before the pay arrives and so there is not the money available to pay it. It might be that there are lots of other payments going out of the account as well, so there is not enough left to pay the loan. It is therefore wise to make sure that you know you can cope.

How to work out if you can afford it

It is relatively simple to work out whether you can afford the loan, but it will take a bit of calculating. Firstly, you need to be aware of exactly how much you will be expected to repay and when; your lender will be able to give you this information. Then you need to look at your bank statements to work out whether you will be able to afford to repay it when you get paid. Look at how much you get paid and how much you normally pay out and whether there is enough left to cover the cost of the repayment. If there is not, then look at where you might be able to cut back your spending so that you can afford it. Look at the specific things that you buy and whether you can go without then in order to be able to afford that repayment,

Remembering you have to manage afterwards

Many people will forget that once they repay the loan, they will have to manage until they next get paid on the money that is left. This is likely to be significantly less than they are used to having. They will need to think about whether this will be enough. Sadly, many people do not manage and they end up getting another loan to help them to manage and this can lead to a spiral of debt. However, careful planning can avoid this. It is wise to have a budget and stick to it. Make sure that you are aware of everything that you have to pay and then you will know what you have left for other things. Try to start cutting back as soon as you get the loan, so that you will find it easier to manage once you repay it. Working out whether you can manage once it is repaid is as much part of calculating whether you can afford it as working out if you can afford to repay it at all. You need to be confident that you will be able to manage and that there will be no need for you to take out an additional loan.

So, whether a payday loan is hard to repay will depend on your circumstances and how well you plan things. You will need to work out whether you will be able to repay it or not before deciding whether you are going to take on the loan or not. If you look carefully at your finances and know how much the loan costs, then you should be able to work this out. For some people, it will show that it will be difficult for them to repay it. But for other people it will show that they will be able to repay it. It very much depends on how much the loan is for, how much income we have and how much we spend as well as how much we can reduce our spending if necessary. It should not be too difficult to work out and it is well worth the time in doing so as if you do not manage to repay the loan on time, you will be subject to extra charges which will not only make t even more difficult to repay but will also make it more expensive.