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If you're short of cash, pay day lenders may seem like one way of borrowing to help in the short term, but you should stay wary.

Pay day loans can be expensive and could affect your credit score. There are more affordable ways of borrowing money to tide you over if you are short of cash. Check out the list of these here.

What are pay day loans?

A pay day loan is a way of borrowing a small amount of cash quickly. This can range from £50-£1,000 and can be paid into your bank account in minutes.

What's the catch?

Well, there are two big ones. Firstly, pay day loans are expected to be paid back quickly, usually in a month. Also, the interest rates are higher than you would find in a high street bank. You’ll sometimes see these as ‘APR’ rates which can be over 1,000%! In some cases, for every £100 you borrow, you could pay back another £30 more.

Should I go to a pay day loan company?

Try to avoid it. It may seem like an easy way to get money for a short term fix, but you could build up debts that are much higher than the amount you originally planned to borrow.

But if I pay back on time, what's the problem?

Even paying back on time can cause problems in the future. Even if you pay back in full and on time, your credit score can be affected.

Your credit score charts your history with money and can decide whether banks or building societies will let you have a bank account, credit card, loan or even a mortgage in the future. Taking out a pay day loan may have a negative effect on your credit score. Having a bad credit score can affect your prospects in the future.

Paying back on time is good, but pay day loan companies may come back to you and tempt you with a new loan with a special offer or rate. You may find yourself in a situation where you‘re short of cash and as you paid back your previous loan, you may feel tempted to take out a new one. But, will you be able to pay back this new loan on time?

If you’re going to get a pay day loan, you should make sure you can pay back the loan on time and in full.

Can I choose when I make a re-payment?

You might be able to agree a date using a direct debit, but if you agree to sign up to a ‘CPA’ (Continuous Payment Authority), then this means that the pay day lender can take money from your bank account at any time they wish.

This might mean that you could lose money from your account that you were saving to pay for priority bills such as your rent, gas and electricity.

What if I can't pay back my loan on time?

If you need more time to pay off your loan, you might end up paying back much more than you originally borrowed and the fees or interest rate may increase. You may also be encouraged to take out a loan from somewhere else to pay off your loan.

By doing this, you’ll be putting yourself in a situation which could spiral out of control.

Are there other ways to borrow cash affordably?

The government offer budgeting loans to help you pay for household items. The loans are interest free so you only pay back what you borrow. You can get this loan if you’re on certain benefits. Find out more here.

Alternatively, you can borrow cash with a lower interest rate from your bank, building society or local credit union. Check out our advice on affordable ways of borrowing cash - to find out more click here.

Payday loans are changing...

From January 2015, the way payday loans work are changing. The government are introducing a cap on payday loans which means you won't be charged more than 0.8% interest a day. This means no-one will have to pay back more than twice that they have borrowed. You can find out more about these changes here.

Even though these changes are taking place, taking out a payday loan can still put your finances in a spin and affect your credit score.

Your next step...

Taking out a payday loan can be harmful on your finances. There are ways you can avoid taking out a payday loan. We also have a range of advice and tips on how to manage and save money. Find out more on the links below.