Payday loans have been in the news a great deal lately with many people arguing that they are dangerous and that they prey on the financially desperate whilst others pointing out that they fill a gap that would otherwise be populated by loan sharks. There is an element of truth to both these arguments. Payday loan companies can be extremely useful to people who are having a one-off bad month and are behind with their bills or need money urgently for something that the bank won’t lend them, but know they can pay it back at the end of that month. Far better to use them than loan sharks. On the other hand however they can be terrible things, with wildly out of control interest and forcing you into a spiral of repayments and more loans. Here are the main reasons you should try and avoid them:

Crazy High Interest –At first glance when you look at a payday loan the interest over the proposed month might not seem so bad. When you borrow £100 and you have to pay £130 back it seems a bit steep, but manageable. Unfortunately, when you work it out over a few months or a year, such rates are nothing short of extortionate. Burrow into the figures a little and you will see that should you fail to pay the loan back in the correct amount of time, (within a month normally) then that interest will roll over into hundreds and then thousands of percent, which can get you into crazy financial trouble.

Relying Too Heavily on Payday Loans: As discussed above, if you use payday loans once, on a one off basis and then never use them again, they can be ok as a financial tool – particularly if you use them instead of a loan shark. Unfortunately a lot of people fall behind regularly and use payday loans regularly too. They then tend to get themselves in the position that they are using payday loans to top up their salary each month and having to borrow again and again – and then having to roll over the interest every month, leading to those massive rates.

Damaging Your Credit Score: Too many payday loans will also destroy your credit rating.

Esther is a financial journalist and blogger. She writes about all areas of personal finance from mortgages to credit cards to tax reduction .