Understanding whether taking out a payday loan makes sound financial sense can be a tricky issue for many people, but here we hope to educate you on the types of borrower that typically use these services.
Drawing on data from consumer watchdog Which?, we have produced an infographic that outlines the differences between people who have a savvy financial sense when it comes to this type of borrowing and those who could be setting themselves up for a fall.
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Payday loan borrowers and their traits
According to our findings, there are two main types of borrowers when it comes to payday loans, ‘reckless borrowers’ and ‘problem solvers’.
In the first instance, the reckless borrower is typified as someone who always seems to be stretched financially, has difficulties in paying back friends and loved ones for money owed, but at the same time enjoys luxuries like foreign travel – even if they don’t have the money to afford to do this.
Overall, our findings showed that 11 per cent of all payday loans are used to fund vacations.
Conversely, the problem solver borrower is someone who generally lives within their means and pays their bills on time, but could resort to payday borrowing should they be faced with an unexpected or extremely large expense.
This group is also most likely to be younger and either new to the jobs market or just out of education.
Indeed, 32 per cent of payday loans are used to pay off regular bills, while in the vast majority of cases (71 per cent), individuals taking on a payday loan will have a repayment plan in place to manage their borrowings effectively.
The risk of taking out a payday loan
It is not all peaches and cream when it comes to the payday loan industry though, as 20 per cent of payday loan users state they have been hit by surprise charges in the past, while 31 per cent of those who have let their borrowings get out of control have been contacted by debt collection agencies.
If you are considering the use of a payday loan then, ensure you have the means to pay it back swiftly and always remember that any type of borrowing comes with an element of risk.
Payday loans can help but beware
Payday loans have had some bad press in the past, but this form of borrowing can have a place in sensible financial planning. Ultimately, individuals considering taking on a payday loan need to weigh up whether or not they will be able to afford the repayments, without their borrowings rolling over and snowballing.
Receiving financial or debt advice could be a better course of action than resorting to this type of lending for many.
However, in a pinch, payday loans can provide a welcome financial boost, but the pros should always be weighed up against the cons by potential borrowers before taking out any deal.
Effective budgeting and managing your debts
Budgeting effectively and making ends meet will always be a better plan than increasing levels of borrowing, so think twice before arranging a payday loan, as careful handling of one’s existing finances could be enough to get you through those present money worries without adding to your debts.
What do you think? Are payday loans a quick and easy form of available credit to get you out of a hole or totally evil? Please share your views below in the comments or chat to us on @ClearDebt" href="https://twitter.com/ClearDebt" target="_blank">@ClearDebt.