Introduction
There are plenty of adverts on TV just now pushing the benefits of payday loans. As a short term solution to a financial problem some think they are good, while others think that these types of lender prey on people, who cannot get a bank loan, are not eligible or have a bad credit history. Many take out these loans unaware of the interest rate they are paying plus borrowing money until pay day only means that when it arrives and the loan has to be repaid you once again are left short of money. So, let’s take an in depth look at payday loans.
What is a Payday Loan?
A payday loan is a small unsecured short term loan that is sometimes known as a cash advance. Borrowers are required to have payslips or payroll evidence of their earnings to qualify. To apply for a payday loan you can visit a lending shop (these are located in most high streets) or you can apply online through one of the many websites. Some shops require a post-dated cheque to be written by the borrower in case the borrower does not return to pay the loan back on pay day. Applying online is a better option as the money will go straight into the borrower’s current account with no face to face encounter.
Who will take out a Payday loan?
It is reported that up to four million borrowers took out a payday loan to help with the cost of Christmas 2012. This is a huge amount of borrowing! These loans are taken out by people who find it hard to get any other form of credit and consequently pay back huge amounts of money in interest. Some of these loans charge interest rates of 4000% so it is no wonder that a third of payday loans are used to pay off previous payday loans. Borrowers end up chasing their own tails, robbing Peter to pay Paul and consequently get stuck in a spiral of pay, borrow, pay again.
We have a Debt Crisis!
Even though payday loans have a bad press and are frowned upon in some quarters, millions of people will still borrow money in this way. Most people will use the money to help pay their way by settling bills or buying necessities only going to prove that it is the less well-off among us that use payday loans to subsidise their earnings.
It’s hardly surprising that many people find themselves relying on payday loans as the cost of living goes up on a daily basis, while our pay stagnates. Tax credits have been eroded with some people losing them altogether, while the cost of fuel is a nightmare for us all.
Voluntary Regulation or Government Intervention what we Think?
Some European countries have already taken steps to ensure that interest rates set by payday loan companies is capped. In the UK we have chosen to let the companies self-regulate creating their own code of practice. This has been criticised by the Office of Fair Trading confirming as thought, that customers in the UK are treated badly. Finally due to much campaigning, in 2014 the FCA has been granted the power to put a limit on the charges that consumer credit companies can charge their customers. This will come into effect in 2014 so until then things will pretty much go along as they have done previously.
What happens if I Take out a Payday Loan in 2013?
If you decide to take out a payday loan in 2013 the new regulations will not be in place therefore you will not be covered by them. Payday loan companies may try to cash in on the delay to the new cap as consumers face a new year of price hikes with no wage rises to cover them. The Office of Fair Trading could try to tighten the voluntary regulation of the Payday loan companies but that is not to say that all companies will heed it.
Summing Up
Payday loan companies are often referred to as loan sharks, a title they do not like or agree with. In fact they state that their fast online hi-tech service is very much in demand by consumers who want a quick and convenient short term loan. They consider themselves a valuable alternative for people who are unable to get a loan due to bad credit or for some other reason.
These companies like to portray their customers as young professionals who are go-getters and pretty clued up when in fact a good deal of their custom is from poorer people who are in desperate need and cannot afford the cost of everyday living. Many people are getting themselves into debt by taking out these loans ending up asking for help from such debt advisors as the Citizens Advice Bureau.
One thing is for sure customers need to think very carefully before applying for a payday loan. Applying for a more traditional loan from your bank, building society or other reputable lender is the first place to go. If you are turned down by these then maybe a relative could help you out? Okay in reality it may not be possible to borrow money from a more traditional lender but If not you must shop around to try to find the lowest interest rate possible. Speaking to a debt manager at the CAB or other organisation may be the key to managing your finances better in future plus they may be able to put a plan of action forward whereby you can manage your debt without needing a payday loan at all.
January Update
It is reported in the press that some payday loan companies may engage the services of debt collectors in order to get payments back from borrowers who fail to repay. This may be in the form of a trial to see how it goes but MP’s are worried that this may lead to harassment plus stress and worry for borrowers who default. We will follow this situation so watch out for further updates.