When the need arises to cover an unexpected expense and other forms of borrowing are not available to you for whatever reason, the option of payday loans, often comes into play.
Despite this type of arrangement being warmly welcomed by a large body of folk, including many for whom it is a reluctant choice, instant payday loans online attract a great deal of adverse publicity and seem to invoke anger among those who feel that they are exploitative and punitive to those who choose to use them.
It is certainly true that if you take the interest rates charged by most payday loan companies and calculate what they would be over a twelve month period, the figure is very high. Yes, borrowing from a payday lender for a year would cost you a lot of money and, yes, the annual interest rate would probably be several thousand percent if you were to do such a thing.
These figures are freely bandied about by critics of payday loans providers and used as ammunition to snipe at them in an attempt to bring them down, to put them out of business or, at the very least, to curtail their activities. These extrapolated rates are no doubt mathematically correct but they are absolutely meaningless and, furthermore, they completely miss the point.
Payday loan companies are not in business to provide loans for a year, nor anywhere near it. They exist only to meet a specific need that many people have from time to time, a need for short term cash advances to cover a gap between an unexpected requirement for money occurring and the arrival of the next payday when funds will be available again. In other words, emergency loans for emergency situations.
When considering payday loans you will be advised that they are only suitable for short term borrowings and that you should be absolutely clear about your ability to repay the loan when payday finally comes. Although some payday loan companies do enable their customers to “rollover” their loan if they wish to and pay it back over a longer period, (usually no longer than three months however), this is not a commonplace practice and is discouraged, at least in principle, by the loan companies themselves.
In fact, so concerned are the regulators, the Financial Conduct Authority (FCA), by this trend, that they recently announced a range of regulatory measures that it intends to impose upon the payday industry in order to improve the entire consumer credit market.
One of the principal measures being focused on among those measures is the question of rollover and, in particular, the number of times that the lender is allowed to permit the borrower to roll the loan over into a second and subsequent period.
The Lenders would also have to display cigarette packet style “health warnings” on the marketing materials and advertising drawing attention to the cost of rolling over a loan. It is envisaged that, before granting a rollover, the lender would have to provide free advice to the borrower on the implications of their actions and the possible consequences.
Although all of this is, no doubt, good practice and is to be encouraged, it should be remembered that payday loans exist to fulfill a need and that need won’t go away, regardless of how much the regulation of them is tightened up.
It is interesting to take a moment to reflection this and consider just what other alternatives there are to payday loans, and just how they compare.
This Question was examined recently by Which, the consumer magazine publisher, who concluded that, while the payday loan companies were being vilified for their high interest rates and alleged sharp practice, their ultra-respectable big brothers are getting away with murder, not by way of high interest rates as such but by other less obvious and inflated charges.
The most shocking example quoted was that of an overdraft arrangement offered by the Halifax Bank. Which magazine calculated that an authorised overdraft of £100 over 30 days with the Halifax would cost £30 in charges whereas the same amount borrowed from Wonga or a similar payday loans company could actually cost less, the figure given being a range between £20 – £37.
It gets worse though – if the customer were to go overdrawn without an authorised overdraft being in place then the rates charged by some banks far exceed those charged by payday loan companies. If £100 were to be borrowed that way for 30 days from Royal Bank of Scotland, this facility would cost £180 in charges, and Nationwide and Santander would charge at least £155, making the rates charged by payday loans companies generous indeed.
Although the banks are quick to point out that this would not be a recommended method of borrowing, certainly without an arrangement in place, it can and does happen and as such it has to be treated with the same level of disapproval as that which is often reserved for the payday loans companies.
So it seems a little strange, although not entirely unexpected, that the forthcoming new clampdown on lenders proposed by the FCA, will not encompass high overdraft penalty charges and default fees.
Which Magazine are taking the FCA to task on this and are pushing to have all such products included within the scope of the legislation. Which are also supporting MP Paul Blomfield’s “Stop the Payday Loans Rip-off” charter which has widespread cross-party support.
The adverse publicity endured by payday loan companies may still be there but they can take comfort in the knowledge that other, supposedly more respectable lending institutions are certainly not averse to racking up the charges when their customers are hit by an unexpected need for a short term cash boost. The practice of rolling up loans across several months does, however, seem likely to be subjected to particularly close scrutiny over the coming months and years.
Commercial short term unsecured borrowing will never be cheap and payday loans will probably always be in demand. Improved regulation and protection for the consumer is to be welcomed but there is a case for saying that such regulation should be across the board and that suppliers of payday loans should not be disproportionately targeted whilst other, supposedly more respectable, organisations get away with making even higher charges.