Five reasons why payday lenders provide a viable and worthwhile service
The payday lenders have more vitriol spouted at them on a daily basis than most of us would be able to bear. In some instances of course this is completely justified, but there are some cases when it feels just a little bit disproportionate.
Payday lenders, as is the case with many businesses, appeared out of necessity. The banks led us on a path to economic collapse, the recession hit, people everywhere struggled to make ends meet and the banks effectively shut up shop. There were no viable sources of short-tem credit. Credit unions were few and far between and those that were around had lending criteria which prevented those most in need from securing a loan.
So, where did those who needed some extra cash to pay their utility bills, or buy new school shoes turn? Well, it was either payday lenders or criminal loan sharks, and in this case even the Archbishop of Canterbury Justin Welby could see the value of payday lenders.
With this in mind, here are five reasons why payday lenders like Wonga, which agrees four million loans every year, may not be the scourge of modern society they are prescribed to be.
No one else will take a risk
Following the economic crisis, a culture of risk aversion became the mainstay in the UK’s high street banks. Small businesses can’t access loans and even mortgages are incredibly difficult to find. So where does that leave those in need of short-term credit for essential expenses? Well, either without electricity or at the mercy of loan sharks wielding baseball bats.
Credit Unions are being touted as the long-term successor to the payday lenders, but their lending criteria is stricter than payday lenders, leaving many without the finance they need.
The banks are no better
Anyone who thinks the banks are a paragon of virtue has an extremely short memory. Not only are many of the banks significant investors in payday lenders, they have also been involved in scandal after scandal, the latest of which is the business loans mis-selling saga, which just proves the banks clearly haven’t learnt their lesson. Of course, that’s on top of PPI mis-selling, Libor rigging and the whole catastrophic mismanagement that created this mess in the first place.
Overdrafts are often more expensive
One of the most commonly used forms of short-term credit is an overdraft facility, and in many cases this is more expensive than a payday loan. The charges quickly accrue even if you slip into your overdraft by a pound and can dwarf the associated costs of a payday loan for a comparable level of credit.
APRs do not properly represent the cost of a loan
Annual percentage rates or APRs are commonly used to assess loan affordability. This is an appropriate method of gauging the cost of a loan over a three or five year period. However, these headline figures which are so often quoted by the press in relation to payday lenders are not an appropriate method of assessing the cost of short-term credit, which should only tide the borrower over for a month.
As of 2 January 2015, the daily interest applied to a payday loan will be limited to 0.8 percent. This means that a £100 loan repaid after 30 days will not cost more than £124.
The industry is poorly regulated
At one stage this might have been true, but in April 2014 the Financial Conduct Authority (FCA) took over the responsibility of regulating the industry from the Office of Fair Trading. Over the last two years a third of the 210 payday loan providers previously operating in the market exited the industry in the face of tougher regulation.
On 1 July, the FCA introduced new rules to limit the number of times payday lenders could roll over a loan. The use of continuous payment authorities to claw back repayments from customers’ accounts has also been limited to just twice. Then there are the cost caps, currently in the consultation period, which will ensure a loan can never rack up more than 100 percent of the loan’s original value in charges, fees and interest, no matter how many times it’s rolled over.
Do you think there’s a place for payday lenders in today’s financial services market? We’d love to hear your thoughts on this issue, so please leave your comments below.