An alternative view on payday loans and how in some cases they can be a very useful tool.
There is lots of coverage around today about just how horrid payday loans are.
They can be. But it’s not the whole story. They can also be a useful tool for overcoming the horrendous costs associated with bank current account un-arranged overdraft fees and charges. Providing you stay in control.
The BBC published this story, which I thought was suprisingly partial. I added a comment, (it’s not published it yet) and thought I would share it here too:
This story is, I think, a little simplistic.
Payday loans and high cost credit does contribute to unmanageable debt. But there are a number of important “buts”.
First, payday loans and other sources of high cost credit are often the only sources of credit available to people at the bottom of the financial heap. Mainstream banks won’t lend to them at mainstream rates. It’s not uncommon for 30% of the loans in these categories to fail – so it’s not surprising the interest rates are high. Organisations like Joseph Rowntree Foundation have done research that shows non-commercial organisations (like credit unions) would not be able to charge less.
Then, the Radio 4 “Today” report on this spoke to a person who’d got into trouble with payday loans. Why? because she could get ONLY payday loans because she had a bad credit history: I wonder whether Tim Harford would perceive a causal relationship in this?
The R3 research, I think, overlooks something rather obvious: That a payday loan, despite the outrageous interest rates, can be far, far cheaper than an un-arranged overdraft from a bank. If one avoids the other, then that can be a huge benefit to budgeting.
Of course if you are one of the relatively few who “shop until you drop” payday lending can feed the habit and make it horrendously expensive. And, if you are a zombie debtor, who is unable to deal with more than interest payments, then payday loans are a form of life-support you don’t need: You should be dealing with your debt instead.