What is a Payday loan?

Despite receiving a lot of negative publicity, payday loans are big business and demand for them has quadrupled over the last four years.

But what are payday loans? And are they really as bad as people make them out to be?

What is a payday loan?
In short, payday loans are unsecured, high interest loans that are designed to be paid back over a short period of time, usually within 28 days of the funds becoming available.

The main benefit of payday loans is that they are available to almost anyone, even those with a poor credit history, as full credit checks are very rarely carried out. This means that borrowers who wouldn’t normally be eligible for credit are often accepted.

Conversely, this lending policy is something that has also drawn a lot of criticism, particularly during a recent Commons debate, when it was suggested by some MPs that payday loans companies and other alternative lenders are no better than loan sharks, lending to the most vulnerable in society and then charging them extortionate interest rates.

And it is these over-inflated interest rates that have been the basis for much of the criticism levelled at payday loans companies, some of which charge in excess of
3,000 per cent interest.

However, because they are lending to so-called ‘high-risk’ borrowers, i.e. those with poor credit and repayment histories, payday loans companies will say that they are simply covering their backs by charging high levels of interest and employing a strategy that is used by most lenders.

But this is an argument that falls down somewhat when you consider that the ‘high’ interest rates charged by more traditional lenders are usually around the 30 per cent mark, a far cry from the 3,000 per cent charged by some alternative lenders.

How to use a payday loan
So are payday loans really as bad as they are made out to be?

The answer to this will depend upon your circumstances and how you use your payday loan.

If you are struggling financially and have absolutely no chance of obtaining credit from anywhere else then a payday loan could be the only option available to you, in which case I would suggest that payday loans are not a bad thing as they give everyone the chance to borrow.

However, if you do take out a payday loan then it is vital that you use it correctly and pay it back in full within the agreed period else you will begin to feel the full force of those interest rates.

In addition, some lenders will give you the option to defer payment until the following month but this should be avoided at all costs as you will once again, fall foul of those massive interest charges.

Whatever your thoughts on payday loans, they are now part of the personal finance landscape and, as with any financial product, they have their advantages and disadvantages.

However, whilst they definitely have their place in the market, a fact that is supported by their incredible growth over the last few years, it is vital that they are used
correctly else they will just add to an already dire financial situation.



0 0 votes
Article Rating
Notify of

Inline Feedbacks
View all comments
Would love your thoughts, please comment.x