Quick-fix loans can lead to long-term woes

IT starts with just a small cash loan, maybe $50 or $100, just to get the borrower through to their next pay day.But fees and extremely high interest rates that compound weekly can quickly turn it into a spiralling debt that eats a bigger and bigger chunk of future pay packets.

Payday lending, which is the practice of lending small amounts of cash to consumers for short periods of time, has sparked widespread community concerns.Concerns centre on the vulnerable low income client base and the effective interest charges that can be as high as 1300 per cent a year.

Compare this to a typical credit card interest rate of 15 to 20 per cent and it is easy to see which is the cheaper loan to have.A big issue is that many payday lending clients have been refused credit cards already by the banks and also might be unemployed or receiving social security benefits so they cannot get approval for a bank loan.

The average payday loan starts at $250 and big differences between them and other loans include:

• LOANS tend to be for a fixed fee rather than an interest rate and the fees are equivalent to very high interest rates;
• THEY are usually for a period between seven and 62 days;
• PAYDAY lenders often roll over loans for a further period for an extra fee, which results in an escalating debt
• SOME payday lenders require security over some of the borrower’s possessions, such as furniture.

Tips to avoid the traps

Payday loans, 12 month interest free deals and even the humble credit card can hit borrowers with costly penalties that can quickly send them further into debt. The key to avoiding these traps is to avoid sales hype and the buy now pay later mentality. Of course, that is easier said than done for many consumers.

• SET a budget that you can afford and stick to it.
• THINK carefully what it is really going to cost you before going to a payday lender for a short term loan.
• SK for help if you get into trouble. Financial counselling can help you restructure debts or change repayment options on existing debts to help manage your money better.
• MAKE sure you understand all terms and conditions of any contract for a credit card, interest free loan or payday loan.
• DO NOT automatically accept a higher credit limit when offered one by your credit card provider.
• TAKE note what penalties apply if you are unable to make payments on time.
• ON credit cards, always try to make more than the minimum monthly repayment. These minimums are not designed to help you quickly repay the debt at the majority of banks it could take almost three years to pay off a $1000 credit card debt using just the minimum monthly payments.

Source: www.news.com.au