If you need money, you may be tempted to take out a loan from a payday lender, home credit provider or – worse – a loan shark. But the interest rates can be sky high and it could be the start of your debt problems. Here are five expensive ways of borrowing money you should avoid:
- Pawn broking
Here you pawn something you have of value in return for a cash sum. You can normally pawn something for up to six months but you’ll normally be charged between 5% and 10% interest a month so it can be a very expensive way to borrow money.
You can find out more about how pawnbroking works and what it costs in my article called 5 things you need to know about pawnbroking.
- Home credit (doorstep lenders)
Doorstep lenders come to your house to collect the payments. These days you can normally apply for a doorstep loan online or by phone, although details of the loan may well be finalised by an agent coming to your home. The interest rates can be very expensive.
Find out more about How a doorstep loan or home credit works in my article
- Payday loan
These days most of the biggest payday lenders are online and offer you a quick decision on a loan. They’ll lend you small amounts of money (most loans are below £400) with the idea that you pay the loan back after 30 days.
Their interest rates can be incredibly high even though they were capped in January. Now payday lenders can ‘only’ charge £24 interest for every £100 you borrow over 30 days.
Although payday lenders are better behaved than they used to be, there are still some dubious practices going on in the industry. Try and avoid them if you can. You can read more about how payday lenders operate and what they cost in my article called Payday loans – a guide to how they work
- Unauthorised overdraft
If you go overdrawn and you haven’t asked your bank or building society’s permission, you could incur a very hefty charge. Some banks charge a fixed fee for every day you’re overdrawn (which could be up to £5 a day), others charge interest only.
You can read more about How much you may pay if you go overdrawn without asking in my article.
- Loan sharks
Loan sharks are illegal money lenders. They may offer you a small loan initially but the amount you’re offered may increase and the interest rates can be gobsmackingly high. In some cases the interest rates can be tens of thousands of per cent a year.
If you borrow from a loan shark the loan is illegal so they can’t demand you pay it back. You may feel like you don’t have any other choice but to pay back the money you’ve borrowed, but you should report the loan shark (you can do this anonymously).
SAVVY TIP: There’s information on how to report a loan shark anonymously on the Gov.uk website.
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