Student Payday Loans – Are They Worth It?
Payday loan company Wonga came under fire for targeting students to take out their short term loans with an APR of 4214%. The company was labelled ‘incredibly irresponsible’ by many experts including Martin Lewis, when they uploaded a page directly offering their loans to students who might be short of cash.
Here at Save The Student! we encourage students to stay away from loans of this sort. They are misleading and can only lead to further financial problems. There are other ways to ease your money worries that do not come with sky high interest rates attached to them.
Wonga may have attracted a lot of media attention since the New Year but they are not the only company that have actively targeted students to take out payday loans. With the emergence of sites like Smart-Pig, a payday loan site solely aimed at students, it is becoming increasingly clear that this is a growing trend.
These companies are taking advantage of students concerns over the fee increase that takes effect in September. However students should remember that fees will not need to be paid upfront so this is little or no reason to consider taking out credit of this nature.
What is a payday loan?
A payday loans is usually a low loan that can be taken out over a short period of time. It is expected that loans will be paid back within the month (once you have been paid). They are also referred to in the industry as ‘cash advances’ and ‘pay check advances’.
Payday loans can be tempting as they provide an immediate influx of cash but it is important to consider the longer term impact of taking out credit of this nature along with the interest costs involved.
What is the problem with payday loans?
Payday loans come with crippling interest rates. As mentioned above, Wonga charge a whopping 4214% APR. APR stands for Annual Percentage Rate and is the interest rate that you would pay over a year.
Payday loans are in theory meant to be paid back within the month but 4214% APR is still shocking. If you were to borrow £100 over a 15 day period you would incur interest of £21.11 and over a month this would double. If you are in enough financial trouble to consider taking one of these loans out in the first place then it is more than likely you will not be able to afford to pay back interest rates such as these.
Payday loans are immensely problematic for people in full-time employment but for students the risks are even greater. A student’s income is far lower than someone in full-time employment so it will be even harder to pay back.
Another issue with payday loans are that it is likely that even if you manage to pay your loan back within the month you will have spent the money that you would be using to live on for the following month. It really is a slippery slope and you could find yourself living on payday loans. This is not a financially viable option.
If you miss the repayment deadline with Wonga there is an immediate £20 charge and an additional 1% interest charges each day.
What are the alternatives to payday loans?
If you’re short of money payday loans should definitely not be your first consideration. There are many other ways of sorting out money problems that do not have the ability to have repercussions later on.
If you ever find yourself in a situation considering a student payday loan then make sure that you have tried every single one of these options and more first!
- Ask your parents – no one particularly enjoys going to either Mum or Dad with money problems but it is worth a try and certainly a more sensible option than taking out payday loans. If you wanted to borrow £100 it is unlikely that your parents will expect you to pay interest. If you need to borrow more and your parents ask you to pay interest then it certainly will not be 4214%. If you have a friend that trusts you then you could ask them too. It may seem drastic but it’s better than the alternatives.
- Access to Learning Fund – it is surprising how many people do not know about this. The Access to Learning Fund is run by your University and allows students struggling to pay for their studies to apply for help. Each case is looked at individually so there is no set amount. Be aware however that you will need to provide evidence of your financial situation and your spending habits (see more on the access to learning fund)
- Other forms of credit – there is good credit and bad credit and it all depends on how you use it. Bank account overdrafts and credit cards are more sensible ways of taking out credit. The interest rates on overdrafts and credit cards are miniscule in comparison to payday loans. For the majority of students you will have a student bank account with 0% interest on your overdraft. (Find more info on student bank accounts)
- Budgeting - it isn’t always possible but giving yourself a stricter budget for your weekly living can make a substantial difference. It is a good idea to always have some spare money in case of emergency. (More on student budgeting)
- Get creative – Look for other ways to make money to cover your costs. You might be able to search for a days paid work on Gumtree or even help a friend out with something. For some ideas to help you along look at our student money making ideas.
- Ask us – We are aware that these options are not available for all students and you may not be able to claim them. If you have tried all of these options and are still in a sticky situation then ask us here at Save the Student! Just contact us or leave a comment below. We will be more than happy to help.
At Save The Student we would never encourage anybody, student or otherwise to take out payday loans or give into the temptations of instant credit. If it seems too good to be true it most probably is. We hope this trend of student payday loans does not continue to grow as unfortunately many students will be deceived and caught out by these irresponsible companies.
If you are really being affected by debt then it’s best to get in contact with your specific students union and talk to a free debt advisor.Last updated 13th February, 2013