Is it time to call time on the payday loan industry?

Danielle Herman

More people are now relying on payday loans to cater for basic living costs and urgent needs, such as house bills, than ever before.

These loans offer temporary relief to cash-strapped individuals who get stuck before their wages hit their accounts. This group usually consists of working-class to low-skilled workers — who comprise the largest proportion of regular borrowers in this sector (Source:SimplePayday.)

Target Group

These loans normally target the lower rungs of society. With self-employed, and low income earners making up the bulk of applicants. These individuals may have a regular income, but sometimes, the income may not be sufficient. There are emergencies which may arise and which the borrower may not be in a position to take care of. Thus, these loans are tailored to cater for these financial deficits and provide respite in the short term.

These kinds of loans are variants to traditional loans, with the condition of credit being extended to be repaid in only one single payment.

Lending Requirements and Eligibility

The requirements for online loans are somewhat similar to those of other variants of cash advances. One is generally required to own a bank account, be employed, and earn a salary which meets a certain threshold per month. However, majority of small lenders do not scrutinize the credit ratings of loan applicants.

In order for you to qualify for credit, you are required to be in employment with income averaging at least £1000 per month. You will be required to create a standing order or request so that the loan can be deducted from your paycheck. If you meet these requirements then you are generally considered a good candidate for credit.

Why These Loans are Attractive to Borrowers

It is worth noting that most small lenders do not pay much attention to the applicant’s credit history. This is a paradigm shift from the strict lending requirements of conventional banks. So, anyone who has bad credit loans from conventional lenders such as banks can still qualify.

Just like other forms of credit, most lenders don’t take into account the credit history of the borrowers because the amounts borrowed are quite small to necessitate collateral. Therefore, borrower find these loans very attractive because of minimum requirements and fast transactions. Instead of asking for collateral, lenders they charge high rates of interest which can be anything between 20–30% from loans between £1000–1500. The high interest rates become a deterrent against defaulters and provide considerable security to the lender.

The Flipside

In spite of the fact that fast loans offer a very attractive and viable option to cater for short term needs, on the contrary, they carry high interest rates. So, it is not unusual to find loan applicants repaying their loans with up to 30% interest rates charged on their loans. The interest serves two purposes, to cushion the lender against unexpected loss and to compel the borrowers to fulfil their financial obligations of repayment.

What the Experts say…

Financial experts argue that the people who apply for online loans are usually in financial problems in the first place and this quick form of credit can only make the situation worse.

Lenders are known for charging extravagant interest rates on the loans with hefty penalties on defaulters. Most people argue that there is really no difference between payday loan lenders and loan sharks. They both charge high interest rates (up to 500%) and the methods they apply in recovering debts from defaulters are very similar.

Payday lenders have previously been known to harass defaulters and sometimes even people who are paying their loans albeit at a slower rate. In their defense borrowers have some of the highest default rates especially for lenders operating online. As a result, they have to charge high interest rates to cover their losses.

Banned in the US

Authorities have long recognized this problem with even some US states banning payday loans as exorbitant lending while others have placed strict legislation on the loans — limiting the amount of interest they can charge.

However, lenders are quite crafty and they always come up with ways of going round the laws to charge the same interest rates. It seems the only way to deal with these loans is to ban them entirely. This solution although it sounds simple would leave people with nowhere to borrow the money which would only leave a vacuum to be filled by loan sharks and other such nasty characters.

This problem is not a new one and legislators have come up with several ways of dealing with the problem from a total ban in some states to very stringent law on interest rates that can be charged. For example, in June 2012 Pennsylvania House of Representatives voted for the approval of a bill to regulate payday loan lending while in 2010 Washington State passed a law limiting the number of loans one can take annually to eight. It is not assured that it will work as companies are great at finding loopholes and coming up with ways of going around the laws.

Stay Protected

As the government puts efforts in protecting you from unscrupulous loan lenders you also need to do your part and become a wiser borrower. Borrow money for only really tough emergencies. The European debt crisis that the continent is going through is as a result of careless borrowers. Taking a cash advance for parties or vacationing or to keep up with your other bills or on behalf of a friend are all very poor reasons and are the kind of actions that will leave you perpetually broke and in debt.

If you need help with existing debts or want to talk to someone about debt contact the Citizens Advice Bureau

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