Tuesday, February 5, 2013

Are Payday Loans Really a Bad Choice?

Loans (Photo credit: zingbot)

We all have heard horror stories of friends and family taking out short term payday loans and ending worse off in doing so. But are payday loans really so inherently-evil and problematic for borrowers? Is borrowing a short term loan with no financial guidance from the lenders more of a problem than the actual loan itself? I would argue and say yes it is, and that lenders need to provide better and clearer information on the loan itself along with the repayment schedule for the financially illiterate.

Arguable, it’s even more likely that you’ll fall into the bank overdraft trap which is seemingly harmless, given how you can do so without any prior warning at all – it’s not like you have to visit your bank’s website first and request to borrow money from them, as this is something included automatically with most current accounts.

Emergency Borrowing When You Need It

Emergency lending is sometimes necessary – to generate some cash you need to dip in for emergencies, or unexpected accidents that are inevitable around the home. For example people taking out fast payday loans to fix a broken boiler in the middle of winter. Its quick cash when they need it and the companies based in the U.K and U.S providing them with these short term loans on average only make around a 9% profit margin per loan according to the government run Consumer Focus UK. This does not accurately reflect the negative public image attached with payday loans.

Wonga is one of Britain’s fastest growing payday loan lenders, and they argue that unplanned overdrafts can have up to 53,000,000% APR which, for short term borrowing, is a colossal jump up from a payday loan’s relatively-small 4214%. Not only does this highlight the risk of dipping into your overdraft, but it raises a more important and often-missed question – why for so long have we relied on our overdrafts when the APR can be so ridiculously inflated and not be complained  about as publicly as we do with  payday lenders?

A Negative Public Image - Dispelled

So why then do the general public shudder at the phrase ‘payday loan’ and bow in defeat to the banks?  It’s quite simple; a payday loan gone wrong receives more exposure through the press and media in comparison to someone who is dipping in and out of an unplanned overdraft and incurring higher costs – banks just don’t get the same reputation as “loan sharks” because they offer lots of other services. Word of mouth hatred for payday loans spreads seamlessly like wildfire through society as a whole. Compare this experience to someone who is financially organised and able to pay it back without any problems - we never hear about good payday loan experiences. The irresponsible use of these loans by members of the public who should never have taken a payday loan in the first place is the very reason the public views them to be somehow dishonest and misleading.

Payday loans are professional and readily available to people on a short term basis. If you are financially prepared and meet your repayment schedule, then there is nothing for you to worry about. You cannot be excluded from a payday loan regardless of any financial scores or assessments that would otherwise restrict you from the main stream credit world.

Making Your Own Mind Up

Consider why payday loans receive such negative press, and who is making these accusations; when you start seeing the patterns of people borrowing to pay for cars, widescreen TV’s and to pay off credit cards, you will begin to understand that the negative press associated with a payday loan is unjust.

Perhaps symptomatic of this irresponsible use of payday loans is the average age group involved – 33.2% of 18-24 year olds have, at some point taken out a payday loan according to the site Open Wonga. So even if this age group tends to have lower incomes, they also haven’t yet developed, arguably, a sense of financial responsibility. Payday loans are like any other good – there is clearly a demand for short-term lending, so it seems wrong to blame companies taking advantage of this. Whilst the government could just ban loans over a certain APR, given the tiny actual profit margins of the involved firms, the market would die off instantly, and many more people would be left with broken down cars, flooded living rooms and frosty temperatures with broken-down boilers. A lender naturally is not incentivized to give money to someone who will not pay it back, so perhaps the media is being unduly harsh on this popular industry that really does provide a useful service – it’s a classic case of buyer beware.

Daniel Hilsden is a personal finance journalist. He provides audiences with ways to cut their spending and blogs on a regular basis for Payday Angels – a company which reviews loan companies, like Payday Express, to make sure you know exactly how much it will cost and what the conditions are, if you’re looking for short-term borrowing in the UK.

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