How a Payday Loan Can Become a Long-Term Loan for UK Borrowers

Alex Parsons Alex Parsons | Secured Loan Expert

Payday loans are appealing to borrowers looking to finance short-term needs. The loans actually take their name from the idea of borrowing money until your next payday. But the way these loans are structured makes it possible for a payday to become a long-term loan for UK borrowers. The loans have a built-in trap that can create a financial nightmare under certain circumstances.

Before we explain the trap of payday loans, it's best to explain their mechanics. A good starting place is the purpose of the payday loan: to provide short-term financing in amounts reasonable enough to guarantee prompt repayment. Payday loans are ideally designed only to cover short-term, emergency needs.

A borrower in need of short-term financing applies for a loan based on his or her current income. If approved, the money is usually transferred via direct deposit. The borrower also provides a debit card or bank account number so that the lender can automatically collect payment on its due date ?? usually the borrower's next payday. If the borrower doesn't have the money to repay the loan, the lender can assess a late payment fee.

The New Loan Trap

Built into the payday loan is what we will refer to as the 'new loan trap'. This trap is what makes it so easy to allow a payday loan to become a long-term loan that only becomes more expensive as you go.

Let's suppose you take out a payday loan to meet monthly budget expenses. On your next payday, you should be repaying the entire amount you borrowed, but something comes up between now and then. You find you don't have enough money to pay off your loan, so now what do you do? You take out a new payday loan to pay off the first one.

This may seem like a sensible strategy, but it's not. Every time you take out a new payday loan, you are also agreeing to pay more interest. And trust us when we say that the interest charged on payday loans, as compared to personal loans and credit cards, is rather high despite action taken by the FCA to limit interest to 0.8% per day.

Just turning over two or three payday loans to keep ahead of what you've already borrowed can put you in a situation of never being able to get your debt completely settled. Between increasing interest and late payment penalties, you can find yourself in an untenable situation in no time at all.

Personal Loans a Better Option

Hopefully, you now understand how a payday loan can become a long-term loan that is too expensive to maintain. You should also now know why experts recommend personal loans as a better option. A personal loan is a long-term loan by default. Still, it's a better option because interest rates are substantially lower and terms are more amenable to most budgets.

Personal loans can be arranged as secured or unsecured products. If you're in need of financing for any reason, it's wise to at least investigate personal loans as one of your options. If you qualify for a secured loan by way of good credit and sufficient equity in your property, you could finance your long-term needs up to tens of thousands of pounds. If you need £5,000 or less, an unsecured personal loan might be better.

A payday loan can easily turn into a long-term loan in the UK due to the way the loans are structured. If you've been thinking about taking out a payday loan, please exercise caution.

Instantly compare 950+ of the UK's best secured loans

Rates from as low as 3.75%