There’s been a lot of criticism over recent months of “payday loan” companies charging extortionately high rates of interest for short-term loans. Some claim that these companies are taking advantage of people on low incomes.
APR stands for “Annual Percentage Rate” and is the amount a lender charges for the privilege of you borrowing their money. The lender is running a business, after all..
A quick search of Compare the Market (using the minimum loan amount of £1,000.00 borrowed over the minimum loan term of 6 months as an example) shows the lowest representative APR of 21.9%. That’s a pretty massive difference, right?
The difference is that Wonga.com or Pounds Till Payday specialise in short-term loans of between £400 and £1,000.00. No credit checks are performed so the loan is pretty much guaranteed. Lenders found on Compare the Market will perform a credit check so it’s not guaranteed that you’d even be accepted for a loan of any type.
Not everyone has a good credit rating. There’s lots of different reasons for this but your credit rating could be affected by missed payments for a regular bill or even if you’ve been declined for any form of lending in the past, including applications for overdrafts or credit cards.
“Payday loan” companies are there for convenience- you pay for the privilege of a guaranteed loan. You’re also paying for the privilege of a short term/small loan amount. “Payday loan” companies even advise you that borrowing money in this way over extended periods of time is extremely expensive.
If you need to get from Land’s End to John O’Groats, you can travel via boat, car, train or even helicopter. Each method of travel and time taken for each will vary greatly but you’d choose one depending on how quickly you need to arrive in John O’Groats. If you need to get there quickly and you had the money, you’d travel by helicopter. If you had little money and/or were in no rush, you’d probably travel by boat. You’d choose the service that was most appropriate to your timing and financial needs.
Likewise, if you need to borrow cash quickly, you know very well that a bank on the High Street is unlikely to be of any use. You’d need to go through an application, wait to see if it’s approved and if it is, wait for the money to be credited to your account. With a “payday loan” company, you apply online and receive the money into your account within the hour.
So, what’s the problem with this?
What people fail to take into account is the fact that they’ll have to repay the “payday loan” within the month. When they pay it back, with the interest, they’ll be even shorter for money the following month. Therefore, you should only use this method of borrowing money if you 100% know that you’ll have the money to pay it back the following month. If you end up using another “payday loan” to pay the original loan back, then more fool you.
No one is being taken advantage of. “Payday loan” companies offer a service and are only exploiting a gap in the market- you don’t have to use their service, do you? If you want convenience, you have to pay for the privilege. This isn’t only true for borrowing money, but also for any other business sector you can think of. Booking a holiday? You’ll pay less for booking in advance. Book it last minute and travel companies will charge you more because you have no choice but to book the holiday at short notice or for convenience.
Don’t use “payday loan” companies for long term purposes. If you have a poor credit rating, there’s so much you can do to improve it. The easiest way is to apply for a credit card with Vanquis or Capital One, who cater for those with a less-than-perfect credit rating. Generally, the APR on purchases is a lot higher than your average High Street bank’s credit card, but all you need to do is use it once a month, for a small amount (perhaps for shopping or petrol) and pay it off when the statement arrives. Even if you make the minimum payment (although I recommend paying the full amount), you’re building up a good credit rating as you’re proving that you can pay off your debts. Once you’ve used your credit card in this way for a while, you’ll have an increased chance of being accepted for a loan or credit card application with a High Street lender.
Another criticism I’ve read of “payday loan” companies is that they take too much money back, duplicate payments or take payments on the wrong date. You need to remember that the main, reputable “payday loan” companies are governed by the FSA (Financial Services Authority). Whilst this doesn’t guarantee that mistakes won’t occur, it does mean that these companies won’t carry out any underhand tactics and if they did, they wouldn’t get away with it for very long. Even if a mistake is made and a payment is duplicated, your bank has a duty to protect you in this sense and refund/reimburse you for any unauthorised payments.
In my experience, people give their Visa Debit card details for repayment to the “payday loan” company they’ve borrowed from. Obviously, any money owed will be taken when the agreed lending period is up. Some of these people (mainly the younger ones) ring up their bank and cancel their Visa Debit card in the belief that the “payday loan” company won’t be able to collect their money. They’ll then worry about sorting it out at a later date.
What people aren’t always aware of is that once you have provided your Visa Debit card details to a supplier of services, you are making a guaranteed card payment, meaning that whatever happens, you owe the supplier of services that money, no matter what. Even if your card is cancelled, the supplier of services can still take their payment due to the way the Visa Debit card scheme works. Because someone has assumed that cancelling their Visa Debit card with their bank prevents this from happening, they’re in for a nasty surprise when their bank account becomes overdrawn and they incur charges after the borrowed money has been debited. This blame is then attributed to the “payday loan” company.
Similarly, agreeing to pay back any money borrowed via Direct Debit with your bank and subsequently cancelling the Direct Debit with your bank doesn’t stop the “payday loan” company from setting up a new Direct Debit and attempting to take the payment again at a later date. In most cases, unless you contact your bank directly, you won’t even be able to tell if a Direct Debit has been set up on your account until the first payment has been taken.
I believe that the general consensus about “payday loan” companies is that as you haven’t physically signed anything in agreement to borrowing money, you can take the piss and attempt to avoid or delay paying any money back. It doesn’t work like that.
“Payday loan” companies are businesses that operate in financial convenience. If you think they are expensive, don’t use them. If you don’t think you can pay back the money you intend to borrow, don’t use them. If you intend to cancel your Visa Debit card or Direct debit with your bank in the hope that you can avoid or delay paying any money back, don’t use them.
You can walk somewhere, or you can get a cab. Walking is free. A cab can be expensive but it will probably get you to where you want to go much quicker. You’d make your decision on which method to use based on financial and time constraints.
Do you see where I’m coming from? I can give you a dozen more examples, if you wanted.
I personally would avoid using a “payday loan” company, but, if I was desperate for a relatively small amount of cash and couldn’t borrow it from friends or family, I would consider using a “payday loan” company and accept that I have to pay for the convenience. It’s simply a service I can use if I want to.