British Homeowners turn to Payday Loans for Help
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UPDATED: Jan 4, 2012
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Struggling to make mortgage payments is not exclusive to the United States. Britain has seen a sharp rise in homeowners turning to other forms of credit in order to keep current on their mortgages. The Guardian reported that over six million people have used alternative forms of credit ranging from intentional overdrafts to credit cards and everything in between.
But, according to Shelter, a U.K.-based homeless charity, the most foreboding fact is that nearly a million of those borrowers have turned to payday loans in order to keep hold of their property.
“These shocking findings show the extent to which millions of households across the country are desperately struggling to keep their home,” said Campbell Robb, chief executive of Shelter, to the Guardian. “Turning to short-term payday loans to help pay for the cost of housing is totally unsustainable. It can quickly lead to debts snowballing out of control and can lead to eviction or repossession and ultimately homelessness.”
Payday loans are small, short-term forms of financing that allow individuals with little to no credit quick access to cash for no collateral. But they receive a lot of scrutiny due to their high interest rates. A typical payday loan consists of an APR skirting around 300 to 400 percent. That APR is so high because payday loans are meant to be paid off by the end of their two week term. If they aren’t satisfied, then the financing rolls over, effectively forcing a borrower to take out another payday loan to cover the cost of the previous, unsatisfied payment.
This process of rolling over is why payday loans have earned the reputation of being debt traps.
Debt trap or not, when, as Robb explains, “Every two minutes someone in Britain faces the nightmare of losing their home,” homeowners will go to great lengths in order to ensure they are not next.
“It is incredibly worrying there is now evidence of people using payday loans to meet housing costs,” said Martin Lewis, founder of MoneySavingExpert.com, to the Guardian. “While it is an obvious temptation to grasp these loans as a lifeline, in the long run it may hurt more than help.”
Housing Minister Grant Shnapps agrees that payday loans are not the answer. “I would urge anyone who is getting into difficulty to seek help in getting their finances back on track,” he told the Guardian. “The quicker households act to get help, the more options they will have available to them.”