Payday loans (or Short Term loans) often get bad press and it’s often with good reason. Some lenders are simply unethical, don’t follow responsible lending practices and have even been known to target and poach vunerable people into borrowing their money. Not what you want from what should be a responsible industry. Combine that with the fact that humans usually favour short term advantage over long term gain, and you can get a recipe for disaster. However an official study by the OFT in 2010 concluded that they provided a legitimate, useful, service that helped cover a gap in the market. Payday loans clearly have their uses, but should be used as they are intended and are only a short term solution.
When Payday Loans Go Wrong
Media outlets often run stories on these products which frequently highlight when things have gone wrong for borrowers, usually when loans are mis-used to boost an individuals income. Usually, the outcome of this is that the borrower ends up in a debt and interest spiral, taking out more and more payday loans to cover their existing payments until they can no longer manage the re-payments. This often leads to bankruptcy, although there are debt solutions which can help people in these situations.
Although many payday loan compaines run a less than ethical practice and unfortunately don´t help people stay out of debts they can´t manage, there are times when a payday loan might be a suitable solution. The times when these products are useful are hardly ever portrayed in the media, and a lot of people don’t realise that there can also be a good side to short term lending.
What Should a Short Term Loan be Used for?
As long as a payday loan is used as it is intended; for short term emergency finance (not a long term solution), they can be useful for people who find themselves needing a bit of extra cash. If you need to sort out an emergency, such as a broken down car so you can get to work, but don’t have the spare cash this month, then borrowing until your next payday may make sense. Often if you go over your overdraft limit, a payday loan gives you a cheaper way of covering yourself compared to any unauthorised bank charges you may have to pay. The point is, emergencies are really the only things they should be used for, otherwise situations can arise where people rely on them month on month to get by and end up paying unnecessary interest just to keep their heads above water. These loans are intended purely for a cash boost until your next payday – no longer.
It´s obvious that some loan companies could do far more to improve their service, lending practices and to ensure that borrowers understand the risk. The potential risks should be highlighted and the fact that these loans are intended for emergency use should be empathised. Warnings should be in place alerting customers that `if they don´t repay the loan on time then they could end up with more charges than they´d hoped for.
It´s also clear that there are some well run companies offering these loans who DO check whether the customer can afford repayments, who DO provide clear terms and conditions (which people more often than not, simply don´t read) and who DO offer a handy, convenient and sometimes money saving service (such as when bank charges are involved) for people who happen to be short on cash for a given month. These companies often don’t receive the good press that the bad companies do, after all, there’s no news like bad news.
Putting High Interest Rates into Perspective
|The high APRs are usually a bit of a sticking point, but it´s worth bearing in mind that an APR is designed for products repayable over terms of 1+ years; hence the reason it´s called an `Annual Percentage Rate´. When you apply the same calculations to a loan term of 1 month or less, things start looking a bit askew. As an example; say you lent your friend a tenner down the pub and he said he´d repay you next week and buy you a pint as a gesture (seems completely reasonable), this would equate to a repayment of about £13.50 for your friend (depending on which pub or bar you go to!). If you calculated this out as an APR, you would in fact be charging your friend 1824.99%! So it´s easy to see how things can get out of perspective. An opinion held by many, and which makes perfect sense is that there should be different regulation covering short term loans so that these things are made clearer.|
Press coverage on bad practices is very important as it helps people to understand the risks and be wary of going into an agreement. The stories of misfortune need to be told and addressed so that regulation can move forward to better serve consumers – in today’s society people clearly shouldn’t be able to get into mountains of unmanageable debt. Ultimately though, there are times when payday loans make sense and people benefit from them. If you’re looking for a short term cash boost and it’s for an emergency situation (where you can repay the debt on your next payday), then it may be a good solution for you, and may be cheaper than alternatives such as overdrafts or credit card withdrawals.
Here’s our simple ‘cut out and keep’ guide of when to use a payday loan and when not to use one (If you’re prone to taking out short term loans on a whim, print it, cut it out and stick it to your monitor or the back of your hand);
When to use a Payday Loan
Short Term Emergency Cash – e.g. car repair bills, washing machine breakdown
When not to use a Payday Loan
For anything else