If you watch daytime TV, you'll know all about Payday Loans from the deluge of advertisements that target what - it must be assumed - is a vulnerable yet receptive segment of the UK population.
Presumably, the TV researchers in ad agencies have delved into the socio-economic profiles of those who watch The Jeremy Kyle Show and other successful daytime TV programmes.
So, are Payday Loan companies exploiting the unemployed and the under-employed, the sick and the vulnerable who are busy watching TV - and not busy earning a living? This is an interesting question of our time, and one that is reflective of the way the financial system in the UK has gone awry.
An often-cited justification for the existence of Payday Loan companies is that they're providing a service that is not now available from high street banks. It's a fair point. After all, anyone who reads the Sunday 'heavies' will know that Sir Mervyn King's attempt at spreading financial largesse throughout the small-business-owning and mortgage-seeking sectors has hit the buffers. We've now been told that the billions of pounds intended to boost the economy is slushing around in bank vaults or propping up their balance sheets.
Either way, it seems harsh that those who choose to borrow from the perfectly legal Payday Loan people are castigated and stigmatised. Ironically, some big bank mortgage lenders are said to be highly circumspect when it comes to 'granting' a mortgage to anyone who's taken out a Payday Loan. They say that this kind of 'behaviour' is a sign of 'financial stress'.
It's also a sign of just how out of touch these mainstream lenders are with mainstream society. In case they weren't aware, the UK economy has been in recession or 'flat-lining' for four years.
Who can blame people who resort to a Payday Loan when their TV breaks down and they can no longer watch Jeremy Kyle - or the Payday Loan ads. Yes, of course, the TV has to be fixed or replaced. And the obvious recourse is - you've guessed it - those wonderful people who charge breath-taking interest rates of 4,000 per cent APR.
Mad Interest Rates?
Hold on a minute! Are those interest rates all they really seem? Surely no-one in their right mind would pay that kind of interest to borrow a few hundred pounds for 30 days or so? No, they wouldn't - and they don't, in reality.
The fact is, the Payday Loan companies are obliged to publish what are heavily-compounded annual interest rates. Many companies don't lend much more than £400 and if you look more closely at the ACTUAL cost of their 30-day loan, it's really not that onerous.
Market leading wonga.com, for example, will lend you £300 for 30 days at a cost of just £96 (in interest and fees). For anyone in a full-time job - and Payday Loans are by definition supposed to be repaid out of next month's pay-packet - £96 is not a king's ransom to get you off the hook of being without a TV, washing machine or any other modern-day essential.
A part of the problem arises with companies who don't fully vet applicants. Do they in fact have a job? And how much debt have they racked up elsewhere? For those unfortunates who cannot afford to repay their loans on the appointed date, the loan can be rolled over - if their Payday Loan company allows it.
Whilst this may look like a highly enlightened approach to lending, it is in fact used to charge even more interest to the borrower. Whilst the more reputable lenders don't resort to this practice, there are enough companies operating on the sub-prime periphery to make this a real concern.
Writing off unpaid borrowings is all in a day's work for Payday Loan companies. This is for the simple reason that it costs too much to go to law to recover what is, in fact, a relatively small amount of money. It must be tempting, however, to use heavy-handed quasi-legal letters and other methods of 'leaning' on people who have no obvious means of defending themselves.
It is these malpractices that have given Payday Loans a bad name. Industry watchdogs have previously declared that Payday Loan companies are performing a useful service in today's society and the 'bad-mouthers' should lay off.
In many ways, the concept of providing short-term loans that cost a fraction of the overall loan value is quite sound. Alas, as with so many aspects of consumer finance, it's when a minority of providers fall foul of the little things that unjustified industry-wide accusations result.
The sad thing is, it's one thing being known as a 'legal loan shark'. It's quite another for the hundreds of borrowers who've been sucked into taking out a Payday Loan with the 'wrong' company. For them, the consequences of default can be catastrophic and life-changing in the worst possible sense.
Mike Beeson is a UK financial copywriter who blogs about financial and other issues. His financial copywriting work often involves confronting the moral dilemmas of modern-day consumer finance. Delivering ethical channels of credit is ultimately a government responsibility as well as the responsibility of financial services companies themselves. The provision of Payday Loans is a controversial topic that falls into this category and is therefore one of the hot potatoes of our time.
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