Pay day loans have been receiving some particularly bad press in recent weeks, with the latest damning article published by The Telegraph suggesting that many short term loan borrowers are being overcharged to the tune of £45 million.
How do Pay Day loans work?
Pay Day loans are designed to be fast access to amounts of up to £1000 for a matter of days up to a month maximum, however as warned by moneysavingsexpert.com, borrowers frequently get caught up in late payment fees that start the downward spiral into unmanageable debt.
Some of the familiar players
Many of us have seen adverts on TV for payday loans. Take for example the older animated characters that advertise the wonga.co.za website for payday loans. They have become iconic figures on their TV ads. Many critics have slammed such well marketed companies for their high interest rates and the way they do business. However, companies such as this offer solutions to educated people that can make savvy financial decisions and of course- can actually pay off the loan on time. It is not for vulnerable people who are poorly educated and can’t make a proper decision with regards to their finance.
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 higher cost of payday loans from lenders can deter those for whom money is particularly tight, and therefore they may choose to consider taking out a larger loan that has a better interest rate. Moneysupermarket.com compares the rates of hundreds of lenders for larger amounts, as banks and other lenders can offer far more attractive rates when you borrow in excess of £1000 over a period of 1 year or more. However it is 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, and other options include taking out a credit card or using an agreed overdraft to bridge the gap temporarily until income arrives.
Time to get money smart
It is fair to say that most reputable payday loan companies make no secret of the interest charges and late payment fees applicable to each borrower, 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.
Pay day 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. The majority of borrowers using the payday loan facilities need to bridge a funding gap due to an emergency or unforeseen circumstance requiring a considerable sum of money that they just do not have access to, however the sensational Telegraph title is unfair to the millions of satisfied payday loan customers who have repaid their loans on time and so avoided excessive charges or late repayment fees.
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 bills such as rent, mortgage and utility bills has reached an all-time high and shows no signs of slowing down anytime soon.
All in all, it has to be said that any loan agreement whether it is for £100 or 10,000 presents very real risks to the borrower if the amount borrowed exceeds their personal funds or ability to repay within the agreed time frame. However we need to stop shifting the blame on to others in our scapegoat society and take responsibility for our own lives, our own decision and our own financial behaviour. If we cannot repay the payday loan before the end of the week then we should not be taking the loan out in the first place.
This writer is likes to write about upcoming and pressing financial issues and challenging the media hype around a topic.