The spiral of debt can be lethal and it's something you should avoid at all costs. This happens when you are in debt and struggle to repay; which results in more fees, more debt and things get out of your hands. Debt is not always bad, but you need to be able to control it. Payday loans are one of the worst financial products you can ever apply for.

What is a Payday loan?

Payday loans are short term lending. They usually last a few days, or a maximum of a month. The amounts vary from £100 up to £1,000. These loans are very easy to get, even on smartphones, which makes them convenient. People often get them to meet emergency costs, which exceed monthly salary or savings.

Payday loans are expensive

Instead of an interest rate, lenders usually charge a fee. An example is a loan for a month of £100, which has a fee of £25, so you have to pay back £125. In this context, credit cards can be cheaper than payday loans. A generic card with a 20% APR would cost £20 to borrow £100 for a year. This is £5 less than what a payday lender charges for a month.

Lenders typically offer 28-day loans at annualised percentage rates topping 1,000+ per cent. The argument from lenders is that since these loans are designed to be repaid quickly, the APR is less relevant than for longer loans.

Your credit rating is at risk

If you are considering to get a mortgage or you want to improve your credit rating,  you should avoid them. Even if you pay the loan back in time, it shows you might have struggled in the past. This adds an extra factor of discrimination that a lender could have while reviewing your application.

Credit agencies, like Experian, place payday loans in a different section on your credit report. That's why lenders can tell how much and how often you have used payday loans.

Recurring payments

Before agreeing to a loan, payday lenders will probably ask you to set up a recurring payment. It is also known as a continuous payment authority or CPA. This is where you give them the 16-digit number on the front of your card.

Although it might seem super useful and handy, it's risky. What if you have an incoming bill payment, such as mortgage or rent or other essential spending? Missing one of those payments will reflect on your credit history, which again will lower your credit rating. This could also take you over your overdraft limit, leading to bank charges.

Spiral of debt

If you constantly live by getting out a loan after a loan, you will never be able to solve this situation. The first step is to stop applying for payday loans, the second is to find a way to cover your debts. The point we want to make here is there is more risk in not being able to pay than in the loan itself.

That's why you should apply for a payday loan only if you know what you are doing and can pay it back. If you still don't know how, it means you can't afford it.