When you’re struggling to get by, it can be astounding to read that many lottery winners in the UK go bankrupt. While it certainly doesn’t account for a majority, several media outlets have projected that the percentage of bankrupt lottery winners is probably about one third. While this may seem far removed from your own reality, there’s a lesson to learn here about managing money—and that’s applicable whether you’re rich or poor.
Why do these rich lotto winners end up bankrupt?
The main reason is that they spend the money on things they don’t need, and don’t take the time to think about the long-term ramifications of their purchases. Sometimes they spend the money on things that are expensive to maintain, and which continue to cost a lot of money even after they’ve been bought outright (properties with high taxes, for example, or boats and other vehicles which require maintenance and insurance). The money isn’t funneled into some purpose which could make more money—instead of thinking of the sudden windfall as an investment in their futures, these winners think of it as a license to spend freely without regard to the consequences.
How does this apply to a normal person who hasn’t won the lottery and who doesn’t have a lot of cash sitting around?
These days a lot of people in the UK are becoming more dependent on short-term loans in daily life. It’s a difficult economy to survive in, which is why short-term loans have become an attractive solution for many different problems. Payday loans, also called cash advances, are some of the most popular products out there. Payday lenders allow their customers to borrow a small amount of money for a short time period, usually under a month. A payday loan can be approved in a matter of hours or days, whereas many traditional loans take much longer to process.
What’s the connection?
Many low income customers who need payday loans perceive of them as a sudden windfall of cash. When you’re sitting at home, trying to figure out where the heck you can get money from to deal with a problem, and you suddenly realize you can get it within hours or days online, it’s easy to believe that you have more financial freedom. You really don’t, however—how you use a payday loan will determine whether it really assists you or whether it leads to more debt and more problems.
Just as many lottery winners go bankrupt because they spend their sudden windfall of cash on things they don’t need, a lot of low income customers use payday loans on things they don’t really need, because the loans seem like “easy money.” Short-term loans come with high price tags however in the form of interest and sometimes fees. Customers who take these loans out when they aren’t needed to get what they want and not what they need end up paying more in the form of interest, and customers who take them out but aren’t sure they’ll have the money to pay them back end up paying fees.
Some customers also get tempted to take out more than they need since lenders usually allow you to pick an amount. There’s no reason to do this however since the result is just higher interest. It’s best to only take out what is really needed and to pay it back as quickly as possible. The timeframe is something else which may be flexible. Taking out 200 pounds and paying it back in two weeks will cost you less than taking out 500 pounds and paying it back in a month.
Short-term loans can be a great asset to low income customers in the UK who have no other recourse to deal with the occasional emergency. It’s important not to take out more than you need, though, and to save payday loans for real emergencies. If a rich lotto winner can go bankrupt by spending money on frivolous things, just think how quickly you could go into debt if you’re poor and spend money frivolously. Use payday loans responsibly and they can be your saving grace when they’re needed most.
This is a guest post from contributing writer John Szabo. John writes about all things finance, business and tech. This time he wrote for Poundaccess, the best in fast payday loans in the UK.