Pay Day loans. A trap for the unwary – or an answer to big bank charges?
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.
Usually, the potential for a lot of consumers to get in trouble with those payday loans is exist because they misuse them and keep renewing, in such way becoming dependent on them. However when payday loans are use only as they are intended, like for financial monetary emergencies (the car breaks down, the unexpected bills appear, etc) they turn out to become an absolute life saver. Actually, I’ve needed to use them in the past. My car did break down and I didn’t have any other appropriate solution how to get to work and I could not afford to miss any more days. So I feel the online payday lenders can help me very much to keep my job. But I paid it off on time and didn’t go back to get another one next week.
Its good to see someone give both sides of the story. Payday loans can really help people that need money there and then in times of need, especially if they have no other means of getting the money because of either bad credit or not having friends/family to rely on. They can also help those with bad credit rebuild their credit history by repaying the loan on time. But I agree they should only be used cautiously and they are often a better option than going overdrawn. Why don’t the banks get as much criticism over their bank charges!