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Payday loans interest explained | Piggy Finance

Payday loans, when used responsibly, are a good product, and can actually save you money or get you out a short term financial fix, we will be writing about this in our next article, but for now we are going to concentrate on how if used incorrectly payday loans can be very bad for your finances.

So you are considering getting a payday loan, and you have no intention of paying back at the end of the month. Well DON’T DO IT! Seriously, it will get you into a lot of debt very quickly, and it will spiral out of control before you know it. Why? Well the interest rate shown on most websites, including ours, is around 1737% APR, but a lot of people tend to ignore this, as the actual interest rate for the loan is around 25% for the term of the loan, which is usually no more than 30 days. So a lot of people see this and think they are only ever going to be charged £25 interest for every £100 they borrow, this is true if you pay back the loan, in it’s entirety, on the due date.

But, if you don’t pay back on time, you are going to get hit with extra late charges and compounded interest. With compounded interest, you work out the interest for the first period (1 month) then add it to the total, then calculate the interest for the next period (month 2) and so on and so on….

For example lets take a very simple £100 borrowed at 25% interest PER MONTH. So in month 1 everything is hunky dory and at the end of the month you are due to pay your £125 back, your original £100 + your 25% interest £25. But you don’t pay it back and decide to try and roll it over to the next month, only now you owe £156.25, this due to the £125 from month 1 + 25% interest (£31.25).

So even by the end of month 2 you owe more than 50% interest of the sum you originally borrowed, pretty eye watering isn’t it? But bear with me it gets worse, as the interest racks up and the amount you owe goes up the monthly interest amount compared to your original loan gets very large. So month 3 you would owe £195, this is made up from £156.25 from month 2 + 25% £39. Month 4 you would owe £243.75 made up of month 3 total £195 + 25% £48.75.  Until at the end of month 12 you owe £1452 from your original £100 lent!!! In reality it actually costs more as the lenders add charges if you miss payments and then charge interest on that, so that’s where the high APR of 1737% comes in. It is the amount you will be charged if you don’t pay back your loan for a year, a yearly interest.

And while some of that is pretty shocking, I only used £100 as an example, if I was to use the max amount of £1000 within 4 months you would owe £2437.50, and within a year £14520, that’s a whopping £13520% interest in a year. So please, only use a payday loan if you are confident you are going to be able to pay it back on time. And if you do get into difficulty contact the lender as soon as possible and try and come to some sort of arrangement, don’t just leave it and try to ignore it. You can use our contact form if you are having difficulty and we will be happy to point you in the right direction.

We are obviously not against payday loans as we run a payday loan company, and believe we provide a genuine, necessary service, but some people who use these loans need to be better educated as to the pitfalls and if we can stop just one person getting into debt by them from reading this article (hopefully a lot more) then we will be happy.

But its not all bad news if used correctly and you pay the loan back on time you should only pay the interest you have been quoted at around 25% of the loan amount dependant on how many days you want it for. And if you use payday loans correctly then it can be a welcome boost to your finances.

We hope you enjoyed and benefited from reading this article, please leave a comment below.

 

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