A total of £1.2 billion is borrowed in the form of payday loans every year in the UK as approximately 1.2 million people use them a temporary means to get by. The short term credit industry enables borrowers to quickly access small loans meant to cover emergency expenses, such as car repairs. Most short term credit companies keep a steady eye to the regulations and are committed to keeping the industry healthy and offering consumers a useful tool to manage financial shortfalls.
While it is sadly the case that a certain seedy underbelly does exist in the industry, a 2010 report found that some short-term borrowers can find using payday loans a positive experience, provided the loan is paid off in the short term. The same report concluded that: “there is currently no clear evidence that banning payday loans necessarily helps consumers avoid financial difficulties. Indeed, the loans can have advantages over some other forms of credit. For example, they can be cheaper than unauthorised overdrafts (which are outside the consumer’s control in terms of whether or not they are granted). It is also possible that, if they were to be removed from the market place, illegal lending could prosper” (Keeping the plates spinning – Perceptions of payday loans in Great Britain, Marie Burton, 2010).
It’s a fact that individuals who cannot manage their finances responsibly use the short term credit services, knowing full well that they will not be able to repay the loan come payday. However, short term credit is a useful tool to those who find themselves in an emergency situation, or even those without access to mainstream credit options. The bottom line is this: payday loans are meant to be a temporary solution. It’s true that the interest rates are high, and can even look exorbitant when viewed in light of annual fees. When fees are viewed in a one to three week timeframe, though, the rates become much more reasonable.
Another way to put the fees in perspective is to compare them to the rates of a high street shop credit card: some cards charge as much as 26% in annual interest. These fees can become unmanageable in a very short period of time. What’s worse is that most cards are not up front about their charges and the amounts can come as somewhat of a shock to cardholders. In contrast, the UK payday loans industry is held to some of the highest regulatory standards in the world. The terms of the loans must be clearly stated and understood, and the regulatory framework is under constant changes in order to protect borrowers.
Because of the lingering distrust of payday lenders, mainstream banks traditionally have a tenuous relationship to these companies. Recently, a major bank adopted a new policy and announced that it would no longer service payday loan companies. This may appear as a silent critique of the industry; however, the very same bank has launched its own short-term product with similar terms. Perhaps they were just ousting the competition.
These events can leave compliant payday loan providers out on a limb. If your bank has recently switched its position on payday loan companies and will no longer provide the banking services you need, companies that offer a payment processing service may be in a good position to help.While big changes and challenges are now facing the online lending industry in the UK, it really pays to have a seasoned payments provider that can guide you through the process and advise the best practices so that you are not running awry of the regulatory framework.
While the common misconception of payday lenders as predatory may persist, it’s clear that the industry is growing, and so is the need for fast, secure methods of sending loan advances and accepting repayment in markets around the globe.