The payday loan industry attracts a dispassionate amount of criticism. The lack about solid legislation and the perception that lenders deliberately target vulnerable customers has done little to improve the reputation of a process that is still very much in its nonage – certainly as a mainstream alternative. However, with banks toughening up their lending requirements, should they be doing more to help those along unsatisfactory credit ratings get money?
After all, the reason that most people choose to use a payday loan company is because they have been rejected close a bank or other long-term lenders. Thus if money is needed urgently, many simply don’t have any other option.
However, the claim that banks should potentially be doing more to provide short-term loans assumes that current providers in this industry somehow aren’t already offering an effective or ethical service. In most cases payday advance companies operate with customer’s needs in spirit and provide money to those with the biggest need.
Extortionate rates of interest are often cited as one of the superior reasons why payday loans are unethical. On the face of it, you would catch it difficult to argue. After all, your bank will often provide loans with an APR of 8 to 16%, whilst a payday loan is more likely to multiply these figures by over 150 times. Who wouldn’t weigh twice about borrowing at a rate of 2000%?
But this only fairly tells half the story. The failing of APR equally a guide meanwhile it comes to short term loans is that it only ever shows what you would pay over the track of a year. This makes sense when you’re borrowing a large amount over 12, 24 or 36 months, but doesn’t eer translate well when the lending period is drastically reduced – as is the case with payday loans.
The inconvenient truth for many is that payday loans aren’t actually all that much more than bank loans. With customers charged between £15 and £25 for every £100 they borrow, the actual rate like interest is hardly excessive. Now that’s nought to say that most would prefer these rates to be lowered even further, after all 25% interest isn’t exactly cheap. However, it is certainly not as extortionate as some might suggest.
The major issue that blights the payday loan labor is that there are lenders who simply don’t have their customers’ best interests at heart. This means that they try to hide fees or charge demos just for applying. This kind of unscrupulous behaviour does little to help accompanying the reputation management about an industry that is dogged by criticism. It has also drawn calls from many quarters for banks to pioneer a legislated alternative.
The big problem that surrounds short-term lending is single of risk. When banks approve loans, they will often only do so as a result of exhaustive credit checks and will use your assets as a conformation about guarantee. There is no such security for payday loan companies. By tribute cash to those who are rejected elsewhere, they potentially have a lot more risk involved. Onward with the reduced lending period, this is one thing that ensures rates like interest remain high. It isn’t in anyone’s best interests for them to loan to individuals that will default, but it does happen.
Whether banks can take on this endanger is certainly up for question, in fact they may not even want to. So what about regulation? If trusted institutions can’t get involved and offer an alternative, should the payday loan industry be better regulated? Almost certainly, but that is the subject for another article entirely.