Are Payday Loans a Help or Hindrance?

Four times as many people took out payday loans in 2009 as they did in 2006.  Total lending in the UK reached £1.2 billion in 2009. A payday loan is a short term cash advance given out by a company but the repayment isn’t necessarily tied to the date of the actual payday.

Payday loans have come under some pretty harsh criticism for their interest rates. Currently there’s no limit to how much UK payday loan lenders can charge as interest, however they are required by law to clear state and advertise the amount of APR they are charging.

However, people commonly take out payday loans to help cover short term expenses that they cannot afford from their salary or savings. Supporters of payday loans say that the charges are in line with the costs of providing such a service. There are also risks for those who underwrite a payday loan, as the market for the service includes those with a history of bad credit who default on their payments.

Payday loans have recently joined the ranks of traditional short term cash lenders such as pawnbrokers and credit union loans, as well as cash advances from credit cards. There are also text loan services which offer short term loans via text message. It’s no wonder some people argue that it’s simply become too easy to borrow money these days.

Advocates of payday loans also say that they represent a ‘democratisation of credit’, allowing a low income sector of society access to loans that they previously would not have been able to afford. Some experts have also stated that there is no evidence that the availability of payday loans leads to an increased number of bankruptcy filings.

An interesting study was conducted by the University of Chicago concluded that areas where natural disasters have occurred could be financially supported by the availability of payday loans. Although this hasn’t been proven, it is an interesting area to study.

Payday loans may or may not suit the individual depending on their unique situation. It’s important to always fully research a short term loan plan, as well as the amount of interest due and the estimated time taken to repay. If used judiciously, payday loans needn’t be a dangerous option. However it’s important to always seek sound advice before embarking on any borrowing plan.

Comments are closed.