As Christmas approaches, festive shopping has begun in earnest. Whether you are splashing out on gifts, getting the house fixed up ready for guests or doing the big food shop, we’re all expected to spend a lot over the next month.
In total we’ll each spend an average of £397 on Christmas this year. But, many of us won’t be funding the festivities out of our savings: 30 per cent of us will have to go into debt to pay for everything, according to Moneysupermarket.com.
If you are going to have to borrow to pay for Christmas this year, think wisely about who you borrow that money from. Last year 1.4 million people were expected to turn to payday loans to fund Christmas, according to the Money Advice Service. Here’s why you shouldn’t follow their lead.
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What is payday lending?
This is a form of borrowing that came across to the UK from America several years ago. The idea is you borrow enough just to tide you over until your next payday, hence the name.
Because the loans are meant to be very short-term, and you get your hands on the money very quickly, the interest rates are massive.
It used to be that lenders could charge what they liked - and they took advantage with some loans having APR rates of over 2,000 per cent. But last January an interest rate cap was brought in by regulators.
Lenders now cannot charge you more than 0.8 per cent a day, but that is still pretty expensive. Borrow £100 for 14 days with Wonga and you’ll still have to repay £110.40. That’s a jaw-dropping interest rate of 1,509 per cent APR.
Moreover, if you needed that £100 because your pay left you short or unable to afford extras in the first place, you might struggle to repay that £110 and have to borrow again.
Is it a good idea?
Absolutely not. Payday loans are extremely expensive and have led to thousands of people becoming trapped in a debt cycle as they borrow more to repay the first loan. The Sun covered the case of one man who borrowed £150 and ended up owing £10,000.
The Financial Conduct Authority (FCA) has come down hard on the payday loan industry in the past year. Many firms have closed, others have been fined and many have been forced to hand back money to borrowers.
One of the biggest cases was Dollar Financial UK. The company behind The Money Shop was forced to refund £15.4m to customers last month. The FCA found that Dollar’s lending decisions were unfair as it often lent money to people who couldn’t afford to repay the cash.
But I know I can afford the repayments
You should still avoid payday lenders because these loans can wreak havoc on your credit rating.
In the future, if you try to borrow either via a credit card, personal loan, or even a mortgage the lender will check your credit history. Many take a very dim view of potential customers using payday loan firms, as they are typically used by those who cannot borrow elsewhere and banks and others see it as a sign you can’t manage your day-to-day finances.
As a result, many lenders will reject your application because of a payday loan you may have taken out years ago. A two-week loan to help you cover the cost of Christmas could jeopardise your chances of getting a mortgage in years to come.
So how should I borrow?
Your first port of call should be your bank. Take a look at your current account terms and conditions and see how much an overdraft would cost you. If the costs are reasonable ask your bank if you can have an overdraft, or an extension of your existing overdraft.
If your overdraft is costly – and be sure to check as some banks charge as much as £2 a day – consider a credit card. The credit card market is very competitive at the moment and as a result you’ll find numerous firms offering 0% purchase cards meaning you can borrow for free and spread the cost of Christmas over several months.
In short, payday loans should only really be used as a last resort - and then only if you really need to spend the money and can afford the repayments. You should ask yourself if those extra pressies are worth the risks.
