Payday loans have been receiving a significant volume of press in 2019. A history of complaints about lenders that have been issuing loans to customers that should never have received them has led to reforms from Financial Authorities to change the lending conditions under which a loan can be issued. Most importantly these new rulings can apply retroactively to loans issued over the last 5 years.
How do Payday loans work?
Payday loans are designed to provide fast access to amounts of up around a grand for anything ranging from a few days up to a month maximum. Some providers have evolved to offer longer term ‘instalment loans’ that can be repaid over 6 months, offering more flexibility for lower repayment rates over longer periods. However, some borrowers are all too easily caught up in late payment fees that start a dangerous downward spiral into unmanageable debt.
Some of the familiar players (and what happened to them)
2019 was a turbulent year for the payday loan industry, with the two major brands in the United Kingdom; Wonga and QuickQuid both collapsing into administration amid a flurry of compensation claims derived from the changing legislation from the FCA which now qualifies thousands of loans previously issued legally as mis-sold.
Getting people educated
Education is essential to the prevention of debt, and a recent article published by The Guardian suggests that better financial sense could and should be taught in schools up and down the country to prepare our children for life in the real world where careful money management is a necessity.
Are there any alternatives?
The high cost of the traditional 1 month payday loans can deter those for whom money is particularly tight, and therefore many consider taking out a larger loan that has a better interest rate. Larger amounts from banks and other lenders can offer far more attractive APR rates when you borrow in excess of £1000 over a period of 1 year or more. A middle ground is the ‘instalment loan’ which allows customers the immediacy and convenience of the payday loan format but allows for flexible repayment over a period of 6 months in lower ‘instalment’ payments each month, this is the product that is now offered by South Africa’s Wonga counterpart.
However it’s often the case that borrowers aren’t looking to be tied in to a lengthy repayment contract and prefer the convenience of a more short term solution in which case other options include taking out a credit card or using an agreed overdraft to bridge the gap temporarily until income arrives. In many situations these are the smartest options assuming you can meet the repayments.
Time to get money smart
It’s fair to say that all reputable payday loan companies make no secret of the interest charges and late payment fees applicable to each borrower. This has always been an explicit legal requirement to display to users, therefore it begs the question who is really to blame for the debt that people accrue? Surely the borrower themselves knows their personal financial situation better than anyone and so should be able to make an informed decision as to whether they can actually afford the loan repayments prior to agreeing a loan in the first place.
There are several fantastic charities available to assist local authorities, schools and councils with how to deliver a successful budgeting course or enable them to correctly signpost children and families on where they can find this information for themselves.
Payday loans are indeed a high interest method of accessing small amounts of money instantly to be repaid within the month, and it is made clear from the outset that they are not intended for regular or prolonged use.
Recession led rise in payday loan popularity
In recent years Britain has faced extreme economic challenges that have resulted in the need for more and more people to access short term loan facilities to make ends meet. With thousands of people across the UK have been made redundant or laid off, the demand for finance to cover every day emergencies has reached an all-time high and shows no signs of slowing down anytime soon.