Opinion Piece: The Payday Myth
Payday loans are expensive with APR’s in the 000’s, the lenders involved prey on the poor and there isn’t a place for them in the UK lending space. This is what the likes of the Daily Mail (see below) would have you believe. But is that fact or just a headline grabbing story to feed readers prejudices? Personally I think there are two sides to every story, and whilst I am not a lover of Payday loans I am a lover of facts.
How they are used
The concept of a Payday loan is to enable struggling families/Individuals, unable to obtain credit or a Bank overdraft, to have a way of raising a small loan to make ends meet.
This normally occurs towards the end of the month prior to salary or wages hitting the Bank. The idea being that the loan props up available income and the loan is repaid when income does hit the Bank.
The headline grabbing story is the calculation of the Annual Percentage Rate (APR), which is based on the borrower having the loan, at that cost, over 1 year. Payday lenders like any lender need to run efficiently so typically the charge for this type of loan is 10-20% i.e You borrow £100 and within a month you pay back £120, this cost worked out as an APR is indeed 000’s as described, but does it tell the true story?
Lets consider an analogy that has happened time and time again i’m sure. Your down the pub and you run out of money, your mate stands you for a few drinks at a cost of £20. The following week you pay your mate back the £20 and buy them a couple of drinks as a thank you. The drinks cost £6. Had this been a loan and the drinks bought as a thank you, the interest, the APR would be in excess of 10,000%. DaftI know, but it does put things into perspective.
Where the old style Payday lenders went wrong was the fee’s and charges they would add to the loan when the borrower was unable to pay, or indeed where they lent money to borrowers that clearly couldn’t afford to repay the loan. The FCA saw this as predatory lending and clamped down on this practice as soon as they had authority to do so. So today, Payday or short term lenders exist but without the extortionate fee’s for late payment and they are legally bound to ensure that the borrower can afford the loan.
The Trap
Where does this leave you if you are trapped into a Payday cycle where you are paying high interest over a longer period than you expected, or where you have historic debt of this nature?
Its a tough one, but in most cases you are better consolidating these loans into one loan over a longer period. That way the repayments are cheaper and more affordable and you will have a definite date when the loan will be repaid.
Typically, you will have obtained a Payday loan because High Street lenders or Banks would not help you out with a short term loan or overdraft, so it is unlikely that they will come to your rescue.
This is where a guarantor loan can help. A guarantor loan is where somebody with good credit, normally a family member, friend or colleague, is prepared to guarantee the loan repayment if you cannot.
Loans with a guarantor are relatively cheap over a fixed period of time with a set monthly payment amount, hence it is generally much more affordable. If you are caught in the trap of taking out loans to pay other loans or are finding your monthly repayments on all of your debt a struggle, consider a guarantor loan, you may be pleasantly surprised at how cheap the monthly costs are and how easy such a loan is to obtain.