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SMS loans are N.A.G.I.

Small, short-term loans, such as SMS loans, can be tempting, but they are extremely expensive, with very high interest rates. The best advice is to stay clear of them altogether. Or, in SMS language, treat them as N.A.G.I. (Not A Good Idea).

Speed loans, SMS loans, payday loans. They come under different labels in different countries but they are essentially small and fairly short-term loans with very high interest rates. They are often called ‘payday loans’ as they are marketed as a way for people to get money to keep them going until their next salary payment comes through. They have grown in popularity and modern information technology, such as the use of SMS, has also made them much more easily available.

People who would not usually be granted a loan, due to having a weak credit history or a low or even non-existent income can often obtain this type of credit. But while it may be tempting to take a short-term loan to pay a troublesome bill for which you don’t have the money to repay – don’t. It is almost certainly guaranteed to get you into further money trouble, as these types of loans are typically very expensive.

In fact, you will likely end up paying that bill several times over. Interest rates on payday loans are always high and sometimes exorbitant. The highest-reported effective annual interest rate in Sweden was close to 76,000% (yes, you read that correctly), back in 2010. With soaring interest rates, payday loans can get many people into personal default or bankruptcy.

The EU Consumer Credit Directive from 2008 does regulate some aspects of payday loans, especially information about the true cost of them – but not the price itself. The UK is one country that has partly addressed the issue by introducing a price cap in 2015, but problems remain.

So if you do have an unexpected bill or just a bill that you’re struggling to repay, don’t turn to the payday loan market. N.A.G.I. Talk to the company that sent the bill or a collection agency such as Intrum Justitia to make a payment plan – there are people who can help you.

Here are more tips for how to handle bills when you are in a tight financial spot.