How to End up With a Massive Payday Loan Balance

A cynical article I am sorry to say. I normally try and write positive articles about borrowing and lending money, but sometimes I have to vent about payday loans.

So lets write a story about Mr Egg who is a typical payday loans trainee. He has never had a payday loan and we are going to show him how to ruin his credit rating and file and end up owing a lot more than he planned.

Lets begin.

It is the middle of the month, any month, and Mr Egg’s mates have invited him to an evening out. They are planning on going to the bowling alley and then go out for a curry. Mr Egg does not have much money left before his payday and he feels he needs, no wants, £100 for the evening out. Quite a lot I know, but they want to make it a great evening and there is nothing worse than running out of money half way through the evening.

Mr Egg decides he needs to borrow £100. He talks to his bank , they are not interested, he asks his parents, they say no, so he looks online at payday lenders. He finds a good looking site with happy faces on the home page and some great testimonials from some made up customers.

It is easy for him to work out how much he can borrow over how many days. So he could borrow £100 until his next payday which is 15 days away. He sees that it is a fixed interest loan with 30% interest. Bit pricey he thinks but what the hell, he will have a great evening out. He then thinks, about the next weekend and decides he might as well borrow an extra £50 for that one. So he selects £150 and sees that he has to pay £15 to transfer the money to him, but he will get the money today, so that’s okay. He sees that the £15 is deducted from the amount sent to him, so he will be sent £135. Umm, that is not so good, he really wanted the full £150, so he increases his loan amount to £200.

He completes the application and is sent the £185, being the £200 minus the £15 transfer fee.

Of course he spends all the money as we expected.

Along comes the end of the month and Mr Egg thinks about that loan. His head still hurts from the hangover, but it was a great weekend. He gets an email from the payday loans company he borrowed from. He owes them £260! This is made up of the original £200 borrowed plus 30% interest. He does not see how he can pay that much back in one go. He earns £1,000 per month and can’t afford to repay the whole loan plus interest in one go.

He rings up the loans company and explains his problem. No problem they say, they can “extend” the loan for another month. All he has to do is pay the interest of £60 and then nothing until the end of the next month. Brilliant thinks Mr Egg.

He pays the £60 and gets on with his life. Middle of the month again and he wants to go out with his mates again. He does not even think about the laon he still has. It was easy borrowing last time so he goes to another lender and borrows another £100 at 30%. This time he does not have to pay the £15 transfer fee which he feels is good.

At the end of the month Mr Egg owes the first loan of £200 plus the second loan of £100, so £300 plus £90 interest. This is not so good. No way he can afford to pay back £390. He will rollover or extend his loan again. Which he does, he pays the £90 interest and he is safe for another month.

Mr Egg is not daft, he knows that he needs to get rid of some of the capital or he will be in paying interest forever. He decides that he will try and pay a chunk of capital off as well. But disaster strikes, his car breaks down and needs a new radiator. It will cost him £200 to have it fixed. This is bad, really bad. He has no choice but to take out an emergency cash loan, yes, another payday loan.

So now he owes £500 and all he has to show for it is a new radiator in his car.

Along comes the end of the month. He has to pay the £500 plus £150 interest. He can’t do it, so he rolls over the loan again and pays the £150 interest. He has now paid £150 and still owes £500.

At the end of the month he does pay off 10% of the capital. He pays the £150 interest and £50 capital, a total of £200.

At the end of the next month, he does the same and pays off 10% capital being £45 and £135 interest, a total of £180. This is getting silly. He has paid £530 and still owes £405. He decides he has paid enough and they can forget it. At the end of the month he does not pay anything – that will show them! Oh dear, Mr Egg was not thinking smart. Both lenders have a clause in their terms and conditions that allows them to add £15 each for him not paying and they chase him for the money. He explains that he can’t pay and after 15 days they add another £15 each.

At the end of they month he owes over £700! How on earth did this happen. Well he had to pay two months interest and the £60 of fines for being late. He had already paid out £530 and now he owes over £700, a total of £1,230. He is in trouble. At the end of the month he pays the interest of £210 plus 10% of the capital being £70. He now owes £630 and he has paid £810. This can’t go on.

Next month he does the same and pays off £189 interest and £63 capital, a total off £252. So now he has paid £1,335 and still owes £567. He still has not paid off the interest, let alone the capital.

The story is not unique. Many people get themselves into this level of mess. Yes Mr Egg needed the third loan for his car repair, but he really did not need the other two loans.