It's a pretty contentious subject and one that many people will have their own opinion on. Are payday loans helping those with poor credit to keep out of trouble, or have they been created to skim money off of the most needy? It's a subject that polarises opinion, albeit with a larger majority swaying towards the latter.
There are unavoidable facts when it comes to payday loans; these include:
- Interest rates are higher
- Some borrowers do get into difficulties
- There are lenders and intermediaries looking to make quick money
However, as damning as this may be in some people's eyes, it shouldn't be forgotten that the very same issues apply to all forms of borrowing. Repossessions boomed as the economy slumped, interest rates increased and the level of unemployment grew. However, this doesn't necessarily mean that all mortgage suppliers specifically target vulnerable borrowers and seek to profit from them.
Small Amounts Over Short Periods
Of course there are major differences between a mortgage and a payday loan, not least the repayment period and the amount made available to borrowers. In the case of a mortgage, you might get a loan of over £100,000 which is spread over 20 to 30 years. A payday loan will generally only be available for a month and will be limited to a few hundred pounds - particularly for first-time customers. And while a mortgage is around 5% per year, a payday loan can be up to 1% per day.
So while a direct comparison may be unfair, this does at least serve to highlight that all lenders are businesses who are ultimately there to make money. They also serve a purpose, whether it's helping someone to buy their first home or ensuring that bills are paid on time, both can be equally important in different circumstances.
Because of the reduced levels of legislation, the short-term lending industry does attract some companies and individuals who are simply looking to make money quickly. Most position themselves as middle men, or comparison sites. While not inherently a bad thing, some do take advantage of this position and seek to charge customers for a service that is effectively worthless.
Lack of Legislation and Industry Scrutiny
Due to the level of scrutiny that banks, building societies and other traditional lenders are placed under, this kind of activity would be almost impossible. Consequently, the payday loan industry as a whole suffers from the stigma of being unmanaged and unmanageable.
Stories of bailiffs knocking on doors and people falling behind on payments, accruing huge amounts of interest do little to dissuade the detractors. There's no avoiding the fact that if you don't pay on time, you will receive a standard charge as well as additional interest on any outstanding debt. If this continues to happen, month after month, then those costs are only going to rise. As it is a short-term solution, it almost acts as a magnified version of what would ordinarily happen on any form of borrowing when a customer falls behind.
Perhaps what it boils down to most, beyond the interest rates and potential misconceptions, is the fact that almost anyone can get a payday loan. While traditional lenders will go to great lengths to scrutinise all applicants and avoid giving money to those who are likely to struggle with repayments, the same isn't necessarily true of all payday loan companies.
On the one hand, this does mean that people with poor credit, but the means to repay on time are able to get the help they need. Equally though, people who are high risk and have continually struggled with credit in the past may also get into further difficulties. Essentially it's the good and bad side of payday loans in a single snapshot; so whether they are evil or not will come down to perspective.