Growth in Number of Britons Turning to Payday Loans
In every country in which a form of payday loans are available, there is controversy surrounding the loans. The UK is no exception. As more and more Britons turn to this type of loan, more detractors express their concern about what that means and to the practices behind the lending.
The Loans
When mortgages were being handed out in the United States without anyone verifying income or other qualifying information, watchdogs cried foul. Today, it is known that such practices, also called predatory lending, helped usher in one of the worst financial crises in recent history. Payday lending in the UK, say detractors, is based on the same principles and leads to similar problems.
Because qualifying for a payday loan involves nothing more than verifying employment and that an active checking account exists, even those with very poor credit can qualify. That means that those borrowers who would be turned down by other lenders can still get a payday loan.
Of course, because there are no credit checks, the risk for non-payment is greater than with traditional loans. That risk is clearly reflected in the amount of interest that is charged. Those who use payday loans in the UK will pay up to 1000% APR, and in some cases, even more.
Repayment is usually made in one lump sum on the borrowers next payday. In some cases, the loan may be split into two payments, but this is the exception rather than the rule. Payment is typically made through automatic debits of the borrower’s account.
Once the loan is paid back, the borrower can then take out another payday loan. The amount one can borrow depends on their gross monthly income and how often they are paid each month. First time borrowers can usually qualify for a smaller amount which will increase after the first loan has been paid back.
The application takes only a few minutes to fill out and, once the borrower’s information is verified, the money is usually deposited directly into the borrower’s bank account within one business day. This makes these loans even more attractive to someone who is struggling financially.
Therein lies the problems, say some.
What it Means
The number of payday loans taken out by Britons has more than doubled in the last few years. The UK has experienced similar issues as other countries when it comes to the average consumer’s ability to obtain more traditional credit options, such as credit cards or personal loans.
The combination of difficult to obtain credit and the rising cost of living expenses make it easy to see why so many more Britons are turning to payday loans, but in most cases it will do more harm than good.
That means that already struggling borrowers now have the added burden of having to quickly pay back a loan with an extremely high interest rate. This leads to very high incidents of re-borrowing, or rolling over the loan, when it is due.
With hundreds of dollars per loan being charged, if a borrower rolls over their loan each payday that can add up to thousands of dollars – just in fees and interest – each year.
There are many who want stricter limits placed on payday lenders. Some ideas include a mandatory cap on the interest rate, a limit to the number of payday loans borrowers can use each year and a required waiting period between loans.
The hope of those advocating such regulations is that it will allow borrowers to take advantage of the payday loans without the loans causing further financial problems.
There are others who want this type of loan banned altogether. If they had their way, payday lending in the UK would become a thing of the past.
While it is quite easy to see the downsides to payday loans, there are some consumers who say the loans have helped them through a difficult month. The key, says payday lenders, is not in further regulating the industry, but in educating borrowers about responsible use of payday loans.
For now, payday lending in the UK is big business. The best way to help consumers is to follow the advice of the lenders and educate them about dangers of using these loans irresponsibly.
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