Needing some cash and considering taking out a loan? Make sure you're aware of the dangers before signing on the dotted line.
Not all loans are the same and there are many that can land you in serious financial trouble when making repayments.
The following five credit traps should be avoided at all cost or at least approached with caution..
Paydays loans are typically short-term loans of small amounts taken out over a few weeks or couple of months.
Originating from the need to borrow cahs to tie you over to payday and then splitting the repayments over subsequent paydays. The price for getting quick cash though, comes with a heavy price, as payday loans come with extortionate interest rates.
For example, QuickQuid currently offers loans between £80 and £1000 at a typical rate of 1,734%. And Paydayloansltd.com offers between £80 and £640 at a rate of 1,355%.
Demand for payday loans has soared during the recession with consumers becoming increasingly strapped for cash. But people facing cash-flow problems should avoid the temptation to fix them this way.
‘Cash for gold' and pawnshop loans
We've all seen the adverts on television offering ‘cash for gold' but according to consumer group Which?, many of the companies behind the adverts are paying a fraction of the items' true worth.
Examples out there of new pieces of jewellery worth £729 drawing just £38.57
Pawnshops have also made a comeback during the credit crunch as banks cut lending. Pawnshop customers receive between 20% and 50% of the cash value for their items (mainly jewellery), but they must pay monthly interest for up to six months.
It can be used to raise cash quickly, but those in serious financial difficulty should speak to their bank before raiding the jewellery box, to avoid hefty interest fees.
Plus, if you dont pay them back on time you lose everything
Cash for gold? Chances are you'll be given less cash than your gold is worth.
Doorstep lenders and loan sharks
Doorstep lenders target people on low incomes with a bad credit record who have typically been rejected from high street banks.
Similar to payday loans, doorstep loans are often small sums, around £100, borrowed over short periods of time with large interest.
Borrowers repay the money on a weekly basis to a local agent who calls at their home.
It should go without saying that borrowing from a loan shark is a bad idea. As the name suggests, they are predatory lenders who have been known to threaten violence if you don't repay on time.
Loan sharks are moneylenders which aren't licensed by the Office of Fair Trading and as such, operate outside the law.
They are fairly commonplace in the UK, offering unsecured loans at high, and often undetermined, interest rates. But many people, desperate for cash, have fallen prey to the sharks, who harass them for getting behind with repayments and pressurise them into borrowing more.
Read how one woman borrowed £500 but was forced to pay back nearly £90,000 over seven years – an alarming interest rate of 2,500%. But beware, it's not unheard of for sharks to charge 150,000%.
It's worth noting that if you have borrowed money from a loan shark, you are not legally obliged to repay the the debt. If you've fallen victim to a loan shark, contact your local Trading Standards office for advice.
Advance fee loans / Credit brokers
Serial offender: Yes Loans
Never deal with any organisation asking for money upfront to get you a loan. Saying its an administration fee or any other fee is a con.
Yes Loans is one credit broker, which always takes £50-70 in upfront fees from thousands of customers.
Yes Loans specialise in providing credit for people with problematic credit histories, charging high rates around 49% APR. But after paying an admin fee so that Yes Loans could obtain a loan of between £250 and £25,000 on their behalf, many of our readers didn't hear anything back.
And their fee was swallowed up.
OK, so you are desperate for some cash and hearing someone say you can have £5,000 next week, will be very hard to ignore.
Once you complete Yes Loans pre-qualification questions over the phone (which includes giving your bank details), you are classed as a client and a fee will be taken from your account – even if you decide not to proceed any further.
But by law, anyone who uses a broker but does not get or accept the credit can obtain a refund of £5 within 30 days.
Speak to your bank before contacting a loan broker. Or use our loan finder to check the small print and apply.
Weekly payment stores
Weekly payment stores are similar to hire purchase schemes in that you pay as you use an item. You could get a Philips 42″ flat screen LCD 8 series television from BrightHouse for around £11 a week.
The catch? typical APR is 29.9%, meaning a total payment of £1,722.24. A tad steep considering you can buy that very television outright for £599 by searching shops online.
If you do want to spread regular payments for a one-off purchase, investigate retailers' hire purchase deals and shop around for the best deal.
And here are three more costly credit catches to be wary of:
Car finance: Don't just go with the car dealership's offer as it's likely to be more expensive. Shop around online and try to compare at least three deals. But don't apply for too many loans as it'll damage your credit rating.
Store cards: These can be an easy trap to fall into. ‘Get 20% off your purchases today if you sign up to a store card' can often be heard from the tills at and New Look. It's a tempting offer but don't fall for it as you'll be more likely to keep on spending.
Debt management firms: Firms that promise to write off loans and credit card bills face a crackdown to protect customers' cash. Be dubious of any firm which promises to wipe out your debt for a set fee. Anything which sounds too good to be true usually is.
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