Loans (Photo credit: zingbot) |
We all have heard horror stories of friends
and family taking out short term payday loans and ending worse off in doing so.
But are payday loans really so inherently-evil and problematic for borrowers?
Is borrowing a short term loan with no financial guidance from the lenders more
of a problem than the actual loan itself? I would argue and say yes it is, and
that lenders need to provide better and clearer information on the loan itself along
with the repayment schedule for the financially illiterate.
Arguable, it’s even more likely that you’ll
fall into the bank overdraft trap which is seemingly harmless, given how you
can do so without any prior warning at all – it’s not like you have to visit
your bank’s website first and request to borrow money from them, as this is
something included automatically with most current accounts.
Emergency Borrowing When You Need It
Emergency lending is sometimes necessary –
to generate some cash you need to dip in for emergencies, or unexpected
accidents that are inevitable around the home. For example people taking out fast payday loans to fix a broken
boiler in the middle of winter. Its quick cash when they need it and the
companies based in the U.K and U.S providing them with these short term loans
on average only make around a 9% profit margin per loan according to the government
run Consumer Focus UK .
This does not accurately reflect the negative public image attached with payday
loans.
Wonga is one of Britain ’s fastest growing payday
loan lenders, and they argue that unplanned overdrafts can have up to
53,000,000% APR which, for short term borrowing, is a colossal jump up from a
payday loan’s relatively-small 4214%. Not only does this highlight the risk of
dipping into your overdraft, but it raises a more important and often-missed question
– why for so long have we relied on our overdrafts when the APR can be so
ridiculously inflated and not be complained about as publicly as we do with payday lenders?
A Negative Public Image - Dispelled
So why then do the general public shudder
at the phrase ‘payday loan’ and bow in defeat to the banks? It’s quite simple; a payday loan gone wrong
receives more exposure through the press and media in comparison to someone who
is dipping in and out of an unplanned overdraft and incurring higher costs –
banks just don’t get the same reputation as “loan sharks” because they offer
lots of other services. Word of mouth hatred for payday loans spreads seamlessly
like wildfire through society as a whole. Compare this experience to someone
who is financially organised and able to pay it back without any problems - we
never hear about good payday loan experiences. The irresponsible use of these
loans by members of the public who should never have taken a payday loan in the
first place is the very reason the public views them to be somehow dishonest
and misleading.
Payday loans are professional and readily
available to people on a short term basis. If you are financially prepared and
meet your repayment schedule, then there is nothing for you to worry about. You
cannot be excluded from a payday loan regardless of any financial scores or
assessments that would otherwise restrict you from the main stream credit
world.
Making Your Own Mind Up
Consider why payday loans receive such
negative press, and who is making these accusations; when you start seeing the
patterns of people borrowing to pay for cars, widescreen TV’s and to pay off
credit cards, you will begin to understand that the negative press associated
with a payday loan is unjust.
Perhaps symptomatic of this irresponsible
use of payday loans is the average age group involved – 33.2% of 18-24 year
olds have, at some point taken out a payday loan according to the site Open
Wonga. So even if this age group tends to have lower incomes, they also haven’t
yet developed, arguably, a sense of financial responsibility. Payday loans are
like any other good – there is clearly a demand for short-term lending, so it
seems wrong to blame companies taking advantage of this. Whilst the government
could just ban loans over a certain APR, given the tiny actual profit margins
of the involved firms, the market would die off instantly, and many more people
would be left with broken down cars, flooded living rooms and frosty
temperatures with broken-down boilers. A lender naturally is not incentivized
to give money to someone who will not pay it back, so perhaps the media is
being unduly harsh on this popular industry that really does provide a useful
service – it’s a classic case of buyer beware.
Daniel Hilsden is a personal finance
journalist. He provides audiences with ways to cut their spending and blogs on
a regular basis for Payday Angels – a company which reviews loan companies,
like Payday Express,
to make sure you know exactly how much it will cost and what the conditions
are, if you’re looking for short-term borrowing in the UK.
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