Are payday loans as bad as they have been portrayed?


January 2014

Are payday loans as bad as they have been portrayed?

Payday loans firms have been well and truly in the spotlight in the past few months, with the high nature of their interest charges, expensive default fees and persistent add on costs contributing towards the negative publicity they have been receiving. 
With the countryís personal debt levels at an all time high, it is unsurprising that profiteering companies such as these have been made the scapegoat for our monetary issues. But are these firms as bad as they seem, and how far have they actually contributed to a more unstable financial community?
The interest rates only hit hard in the long term
Payday loans have notoriously high interest rates with most having an APR of between 1500% and 4000%. This represents a huge amount of interest to pay on if you were to borrow a loan for a year, but the reality is that most people use them for one to two months, meaning that the impact of the huge APR rates are not as damaging as it may seem. 
If you were to borrow £1000 for a year at 4200% then this would mean you would have to pay back over £2500 in interest charges. But people forget that payday loan finance is intended for short term borrowing, and as such you would only have to pay £250 interest for an £1000 loan. Yes this is a lot, but on a smaller scale, a £25 interest fee for £100 borrowing is not has potentially harmful as some media portrayals have made out. It is worth remembering that payday loans are not long term finance, and are not suppose to substitute in for a medium range loan. 
Instead, they are intended for one month use, and in this sense, they perform their function without posing huge danger to the borrower.
The problem it seems is from the people using them, as they have chosen the wrong option for finance if they intend to borrow for longer than a month. Payday loans, as they sound, are suppose to cover the period between one of your paydays to the other, so if used properly, by a responsible borrower, should not pose a serious threat to someone.  
Your credit rating is damaged- but is it their fault?
In recent times it has come to light that applying or having a history of payday loan borrowing damages your chances of acquiring credit or a secured mortgage from a bank, because it negatively affects your credit file. 
The reality is that the majority of payday loan users probably applied for credit from the bank initially, but were rejected due to the strict criteria needed to obtain credit in todayís financial climate. The bank rejection itself lowers their credit rating, which decreases their chances of getting a loan from another bank. 
This then turns people to forms of finance where they are likely to be accepted, i.e. payday loan firms who provide them with the short term funding that the bank refused to do. The question here is whether your credit rating being damaged is the fault of the payday loan company or the bank, as it seems that bank rejections have a huge impact on the number of people using a payday loan firm. Yes, payday loan borrowing suggests irresponsible money management, but it seems slightly unfair for banks to issue this verdict considering that they are the biggest contributor for turning people to payday borrowing. This provokes the bigger question; are payday loan firms being used as a scapegoat for banks conduct?
There fees can be frequent, but not that high
As well as the huge APR attached to them, Payday loans have also come under fire for the number of default and interest charges they apply to peopleís accounts. These often equate to charges such as £20 fees a week, though this is specified in the initial contract that the borrower signs when they make the agreement. 
From a business perspective, are you inclined to just wait and let someone recover if they fail to uphold to their contractual agreement? Perhaps payday loan firms should stress that loan terms are only suited to single month lending, and should emphasise all terms and conditions clearly. 
However, The inference again seems to be that a large part of the problem comes from people in the UK, who essentially leaving themselves vulnerable to money problems from payday loan companies by signing up for deals that they simply cannot afford, or are fully aware of. Yes, payday loans are dangerous, and are typically vague with their terms, placing them in small print. 
But surely it is time to stop pointing the finger at institutions, and start focusing on our own self improvement. We donít have to use payday loans. What about peer-peer finance? Or Credit Unions? Even borrowing from a family member? 
All of these options are available to people suffering short term financial difficulties, but instead they utilise payday loan companies for longer than a month, fail to clear the balance, and then create a furore about being in default. 
Once youíre in default, the pressure cranks up
Thus far, the greatest shortcoming of payday loan firms seems to be t heir intentional vagueness and lack of clarity on the full extent of late and interest charges once you go into default. And it is when you go into default that it can be argued that the media is at its most accurate when criticising payday loan firms, because they are relentless in their pursuit of your money. 
Most payday loan firms will launch a bombardment on your mail box and phone, calling and mailing you over and over again if you go into default. They will often be threatening, and can make your life and living hell if you do not act fast and repay your debt. However, it should be remembered that going into default involves the borrower reneging on their payment agreement with the lender, meaning that it as least partly the borrowerís fault that they find themselves in such as harassing predicament. 
Payday loan firms definitely have their shortcomings, and are particularly bad when it comes to debt repayment. It is also undoubted that they exploit the desperation of people in debt, and try and maximise profit by offering the chance to roll over their loans. However, the media crusade against them can be seen as partially unfair considering that it was banks that caused the economic downturn, and it banks who push people towards them in the first place. 

Furthermore, all of payday loan firms deficiencies are only damaging if the borrower acquires money from them without thinking about the long term repercussions, and anyone who uses a payday loan firm for its actual purpose, to cover payments before their next payday, will not experience any of the turmoil that are identified in the paper. It is time for the people of the UK to start taking responsibility for their financial problems, and stop pointing the finger at the easiest actions to do so. 

If we all managed our money well, and borrowed responsibly, then we should not need to use payday loan firms, and wouldnít fall into such financial decline when using one. Clearly it is about being more financially astute, and reading the loan terms of all potential arrangements, before signing them and being more aware of all the financial institutions available to us such as credit unions and peer-peer finance. 
In this way, we do not put ourselves at risk of payday loan debt, and have the right answers to our problems should we ever fall into short term financial difficulties.
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