AVOIDING LONG TERM DEBT

 

Warning: Late repayment can cause you serious money problems

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Times have been tough for many people for a few years now. The economic downturn has meant that people have had to adapt to new ways of working, living and managing their money. We all certainly know what austerity means now don’t we! Despite money being tight for families up and down the country, you’d be forgiven for thinking the exact opposite was true. Daytime TV is awash with financial companies offering all manner of loans. You wouldn’t have to go back too far in time before anyone would even know what a pay day loan is. Today, that’s a very different story.

In difficult times, everyone needs to tighten their belts. The problem comes when the belt just can’t be tightened anymore. As everyone who’s ever been paid monthly will know the next payday can always seem a long way away. When this happens, it’s all too easy to be swayed by the promise of quick, easy money on a repayment schedule that seems incredibly attractive. Whilst the repayments might seem affordable, the interest rates that pop up and disappear in the blink of an eye can seem unbelievably high. As the money for this month runs out, its tempting to fill the gap with a pay day or short-term loan.

Of course, pay day loan companies make all that new found debt sound so appealing. Complete their form online or via an ‘app’ on your smartphone and you could have the money in your bank account in just a few hours. It all seems too good to be true, but it’s not. Not really. They aren’t doing anything illegal, they are simply providing a service to those people who need it. Unfortunately the problems aren’t always obvious to the people who take them out. Yes, the interest rates seem high, but as these types of loans are taken out over a very short period of time, the actual monetary amount may not be that much, especially if the loan is only for a few days. The problems come when you waiver from the agreed schedule or miss a repayment. As quickly as you applied for the loan, a short-term loan can quickly turn into a long-term debt problem.

If you do decide to take advantage of one of these types of short-term or pay day loans, there are number of simple rules to follow to avoid slipping into this trap. The first one is arguably the most important which is not to tempted to borrow more. As John Barrymore remind us, the barren time that exists between the money running out and your next pay day is an all too regular one. The reason we call them pay day loans is because they are supposed to be repaid when you next receive your salary. If you take out one of these loans as a ‘one-off’ then that may be fine. The temptation though is to borrow more to fill the next gap before you have repaid the first one. Don’t, however appealing they may sound be tempted to take on more debt. Use the opportunity to discuss what you can afford and offer to pay a realistic amount. This is often the point that the spectre of long-term debt rears its ugly head. People tend to do nothing, they pretend the problem might just go away on its own and don’t act until its too late. Missed payments can rack up incredibly high penalty payments and / or charges which often dwarf the payment you should have made. Once you’ve started down this path, you can end up in serious financial problems. You may not have noticed or paid much attention to the small print on your loan agreement, but they will have been stated, so you will struggle to do anything except pay them.

If you’ve set up a direct debit to make your repayments and are having problems, stop the payment. Providing you leave enough time to do so, your bank or building society should be able to help you. This may seem like a backwards step, but there are rules that your lender should be following. If, for whatever reason, you can’t afford to pay, then they aren’t allowed to take any money from your account without your authorisation. They’re also not allowed to hassle you or members of your family to make additional repayments. Many pay day and short-term loan lenders must follow a Good Practice Customer Charter (GPCC) and all should follow certain rules that have been set down by the Financial Conduct Authority. If they don’t take your offer of repayment seriously or attempt to help you resolve the issue, you can make a complaint.

Remember though that the companies that lend money on a short-term basis aren’t all bad. It’s usually only the worst examples that attract the horrific newspaper articles. Short-term loans are used by many people around the world to solve short-term financial problems everyday. Most of them are paid back on time and on schedule without any problems at all. Remember too that there is a risk with any type of loan. Some of those risks aren’t obvious when you take them out, or can even be foreseen. Ill-health, redundancy or larger unexpected financial problems can have a massive impact on your lifestyle and your ability to repay a loan. What started as a perfectly reasonable amount to pay back can soon escalate. Even with the best will in the world and greatest credit score, life can throw you a curve ball at a moments notice. You need to make sure you’re ready for it. If not, act responsibly and you can help safeguard your financial future.