High street lenders and online financial firms offer short-term loans to help people make it to their next payday. These payday loans are incredibly easy to obtain even with a checkered credit history. As long as income is above a minimal threshold, an applicant can be approved for a cash loan with a quick turnaround. Funds can often be obtained in as little as an hour.
The cost of this convenience is high though. Borrowers must pay extra for these loans to cover the cost of advertising, overhead and profits. The biggest cost though for payday lenders is the bad debt expense. Unaffordable loan products carry shockingly high default risks. Proceeds that are written off as uncollectible contribute to higher rates charged to everyone else. Of course, any firm that raises the cost of such loans directly increases the default rate.
When someone is facing late fees, evictions and other challenging situations, it can be tempting to turn to lenders who have a habit of saying “yes” to applicants. Many borrowers don’t understand the actual costs. Some incorrectly believe that the government protects them from unfair products. Some purposefully obtain loans that they know they cannot repay.
These payday loans have historically carried a very high risk of default, since those who turn to these products typically have a history of making poor financial decisions. Still, some estimates put the interest charges at 60 times what these loans actually cost the providers.
A payday loan comparison
While consumer advocates agree that payday loans are a poor option, there are still widely varying differences between the terms of these loans. Here is a comparison of the most common providers’ rates from high to low.
|Uncle Buck||9,801.8% APR|
|Payday UK||6,310% APR|
|Payday Express||4,720% APR|
|The Money Shop||3,375% APR|
|Payday TopUp (broker)||3,257.5% APR|
|Cash Float||2,786% APR|
|Cash Lady (broker)||2,670% APR|
|KwikPayday (broker)||2,670% APR|
|UK Payday Today (broker)||2,327.87% APR|
|Mr Lender UK||2,216% APR|
|True Blue||2,108.81% APR|
|Purple Payday (broker)||2,023% APR|
|Blue Sea Payday (broker)||1,974% APR|
|CashCowNow (broker)||1,737% APR|
|Payday Pig (broker)||1,737% APR|
|Cashub (broker)||1,734% APR|
|Paydaylady (broker)||1,734% APR|
|TideMeOver (broker)||1,734% APR|
|QuickQuid FlexCredit||1,392% APR|
|Pounds to Pocket||278% APR|
*Rate comparison conducted 17 September, 2014
An initial review shows how wide the variance is on rates. Yet those who obtain these products rarely compare interest rates. If they did, they would avoid these products altogether in favour of more mainstream loan products with much more reasonable terms.
Public sentiment is mixed. Many people are appalled that such rates are even allowed by the government.
Others feel that if someone is stupid enough to agree to such terms, then they deserve all of the financial misfortune they are bringing on themselves. While that may be partially true, we must remember that it is ultimately the burden of the government, taxpayers and other lenders to pay for the defaults on these loans, whether through higher taxes to fund social programmes or through higher rates charged to offset those defaults.
It is the responsibility of consumers to shop around for the best solutions to their problems. Government’s role is to protect vulnerable populations from their own gullibility. The Financial Conduct Authority (FCA) has begun to address these concerns through greater regulation of the industry.
The FCA has already taken action against some firms for improper behaviour. Fines have been levied. Some lenders have taken a break from new loans while they restructure to regain compliance with consumer protection laws.