Why do payday loans get such bad press?

Summary: This article gives an overview of payday loans and some of the issues that may be related to them.

Payday loans are so called as they are designed to be short term to tide someone over until payday. They are generally for smaller amounts of around £200, and are popular as they can be paid into a bank account within minutes of the successful application. Furthermore, payday loan lenders will often lend to those that may have been previous declined a loan elsewhere due to a poor credit rating.

Charges

Probably the biggest criticism of payday loans and the companies that offer them, is the potentially massive charges and interest rates that are associated. Furthermore, it is not always clear or easy to understand how much these charges can be. As with any lender, interest rates must be published, but due to the short term nature of payday loans and the way the charges are applied, an APR can be very confusing, often working out in multiple 1000%. Many lenders charge in the region of £25 per £100 per month. So for a short term loan of £200 this will cost £250, assuming the loan is paid within the agreed time scale, which leads to the next major criticism of payday loans.

'Rollover' loans

These are loans that have not been paid by the due date, and the lender has agreed to 'roll over' the loan for a further month. However, the charges will still be applied to the loan. Using the previous example of £25 per £100 per month, £200 over a month will costs £250 but if the loan is extended by a month, it will become £300. If the loan is extended up to 6 months, the total to repay will be £500!

Lending to vulnerable individuals

Due to the very nature of payday loans, they can be appealing to those who are on lower incomes, benefits or are already in financial difficulties. Furthermore, there has been a lot of criticism in the past of pay day loan lenders not doing stringent enough credit checks, resulting in lending to those that clearly could not afford to repay it. There have been hundreds if not thousands of publicised cases of individuals borrowing a small amount to buy essential items at the end of the month, struggling to repay the original amount and ending up owing thousands to the lender with the amount increasing daily.

What is being done to clean up the payday loan industry?

Payday loan lenders are encouraged to be members of a union, and as a member of a union they have a responsibility to follow the Good Practice Charter which states the lender must be open and transparent with the customer and carry out thorough credit checks, but there are still a few less reputable companies that may not always adhere to the rules. However, in June 2013, it was announced that the Competition commission is to carry out an extensive investigation into the industry over claims that they are hugely benefiting from customers that are unable to repay their debt on time.