Even with new regulations in place to curb the massive spiralling debt caused by these debt instruments, micro loans still tend to be a major sore spot for many consumers. With flashy ads that downplay the true cost of these loans, many do not realise the extent of the costs or the added extra fees associated with these loans. In truth, there are very few circumstances that will make these loans attractive without putting you further into debt.
How they Drain You
A micro loan or pay day loan as they are often referred to were initially meant to be small one-time, short-term loans only to help with emergency situations that require a bridge loan. This bridge loan is meant to enable you to still pay your necessity bills such as food, rent and utilities until your pay arrives within a couple days. Unfortunately they have become instruments of mass appeal to provide a quick solution without any roadblocks for those that want to spend money on non-essential items.
A micro loan is often offered from £100-£300 to be repaid, generally within 30 days, upon your next payday. Usually the loan is setup of automatic deposit and withdrawal to and from your bank account. This allows the funds to be deposited directly to your account for easy and quick use, but also allows the lender to take their payment directly from your account when the term is up. This could be done even though you may need your pay to pay for rent, utilities and food.
Interest on these loans have now been regulated so that the maximum 30 day interest on a £100 loan can be no more than £24 if the loan is repaid. Further stipulations on the industry ensure that no more than double the original amount borrowed is ever paid back. Yet many lenders encourage the rollover or deferral of your micro loan in order to reach this cap before attempting collection. This allows the lenders the ability to make 100% on their loan to you.
Imagine that every time you take a micro loan it will cost you 100% in interest or fees, this may help you consider these types of loans only as a last resort, and only if you can absolutely repay them within the payment period allotted.
Almost any other source of funding is preferable to a micro loan when you consider the full cost of the loan. If you are in true financial hardship a simple micro loan will not help in the long run but will actually speed up your financial collapse. Instead look for alternate means of loans including from your banking institution, credit cards or even family or friends. There are also benefits or government loans for financial hardship that can help you get over difficult times such as a job loss, bankruptcy, losing your home, catastrophic events and others.
If you cannot afford to repay the micro loan in its original term then you cannot truly afford the micro loan and should look at other ways to obtain the funds.