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Payday loans – A short term solution or a long term debt?

Since the introduction of payday loans in 2006, the industry has rocked and every year over a billion pounds is paid out to UK customers alone. The introduction of payday loans began in the US market but quickly spread over to the UK as the US began to introduce regulation to the industry. The UK has been slow to follow suit which means that it is still largely unregulated and consequently payday lenders continue to take advantage of the UK market in that they supply an unlimited amount of short term loans at high levels of interest. Therefore whilst payday loans can be a useful source of short term income, thanks the limited parameters around the terms and conditions, they can often turn into long term debts.

The premise behind short term loans is that the lender supply’s a small amount of money say anything between $80 to $1000 to the borrower for a limited period either 14, 28 or 31 days. The average amount of interest (APR) charged is 1737%. This seems a high amount of interest however if you break it down it means that $25 is charged for every $100 borrowed for that time period, therefore if used properly a customer borrowing $100 for the agreed time period will pay $125 back to the lender. This seems like a good source of short term income if all terms and conditions are adhered to.

There is a darker side to the payday loans industry however and that is largely due to the lack of regulation payday lenders are subjected to. This means the following:

  • Payday loans that are not repaid within the agreed time limit will be deferred and incur a charge. This charge is usually another month’s interest.
  • There is no regulation on the amount of months a loan can be deferred therefore it is easy to spiral into debt i.e. an interest charge of £25 for 12 months is a sum of $250 to borrow $100 for a year
  • There is no regulation on the amount of payday loans that a customer can sign up for. Again the implications of this are worrying as the more money borrowed, the more interest incurred and if there are multiple loans, this level of interest will quickly become unmanageable
  • There are no credit checks on payday loans which means that customers are not audited against their ability to repay the loan before they are awarded the loan. This means that customers may not have the capacity to make the repayments and subsequently spiral into more debt the longer they are unable to make the repayments.
  • The payday loan industry has been criticised for its aggressive advertising techniques which deliberately target vulnerable audiences. Some companies do not advertise their high levels of APR.
  • Payday loans are too accessible as they can be requested by anyone with internet access and there are no checks other than needing a bank account and some source of income.

If used sensibly, payday loans can be a good source of short-term income, but they should only ever be used as an emergency last minute resort. Unfortunately the nature of payday loans means that it is often the financially vulnerable who have poor credit history, no other means of borrowing and do not understand the implications of the high rates of APR that sign up to these types of loans. The implications of taking out a payday loan over a long period of time or even taking out multiple payday loans are unfortunately severe long-term debt.

Laura Susstance is an established freelance content writer from the UK, specialising in writing financial content. As well as writing guest blog posts she regularly contributes to her own site: http://fastpaydayloansreview.com

 

{ 1 comment… read it below or add one }

short term loans June 15, 2012 at 6:09 am

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