More Brits are turning to payday loans for unexpected costs

By UK CreditCards.com

UK consumers are increasingly turning to payday loans instead of overdrafts or credit cards in order to pay unexpected bills, a survey suggests.

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Research commissioned by The Money Shop, a payday lender that forms part of Dollar Financial UK, suggests that this type of unsecured credit is becoming more popular, with a growing number of people recognising the benefits of this form of short-term borrowing. However, there are also some dangers that consumers should be aware of when considering a payday loan.

One in 10 use payday loans for emergencies
Britons who may once have dipped into their savings or used their credit card to meet the cost of unexpected emergencies are increasingly choosing to take out payday loans, new research has found. Surveys conducted by the Development Team Limited, JRA Research and TNS Phonebus on behalf of the Money Shop revealed that more than one in 10 consumers who have used a payday loan did so in order to pay for parking fines, vet bills, house repairs or other unplanned expenses.

Payday loans offer range of benefits, argue advocates
When asked about their choice of unsecured credit, survey participants revealed a number of reasons for selecting a payday loan. The vast majority of respondents (94%) said that this type of short-term loan gave them access to money when they really needed it. Nine out of 10 borrowers also liked the fact that they knew exactly how much they would need to repay.

The research also showed that 67% of payday loan users were reluctant to use an unauthorised bank overdraft because of the associated charges, while 72% said it was difficult to borrow from a bank or building society.

Andrew Bryan, a spokesman for the Money Shop, claimed that Britons seem to be using payday loans in the most appropriate way, with just 11% of survey participants accessing them for entertainment purposes or holidays.

"Our payday loan research shows that people are being sensible and using payday loans for exactly what they are intended for," said Mr Bryan. "Getting through to the end of the month can prove to be a stretch for many households, especially when emergencies arise. Payday loans provide a useful alternative for people if money is tight."

But payday loans carry substantial risk, warn critics
However, borrowers who choose to take out a payday loan face significant risks if they do not manage to pay back the loan on time. While these loans may seem like the ideal 'quick fix' solution, consumers can quickly spiral into debt, as the interest rates are much higher than those on a standard personal loan or credit card. People should therefore consider all other options before opting for a payday loan and should only take one out if they are absolutely certain of their ability to repay the loan on time.

The dangers of payday loans were highlighted by a recent survey by the Debt Advice Foundation, which found that online searches for this type of borrowing had doubled over the previous 12 months. The charity also discovered that 41% of people who were struggling with debt attributed their difficulties to payday lending. Managing director David Rodger described payday loans as an "expensive" form of credit and urged consumers to study the loan agreement "and make an informed choice as to whether it is right for them".

See related: 4 wrong ways to pay off credit card debt; Number of cash-strapped Brits at all-time high

Published: 11 November 2011