Picture this: It's Thursday today, which means that your wages don't come in until next Wednesday, the last day of the month. The kids needs their school dinners to be paid for and your youngest has a trip to Chester zoo which needs to be paid for by tomorrow. On top of that, you really need to get that issue with your car's brake light seen to, it could cause an accident. You need just a little bit of money to tie you over until next week but you can't ask mum again, it's not fair. So where is it coming from?
It's for this reason exactly that what we now call 'payday loans' came about. Lower value but high interest loans that are designed for short term use. You may have heard a great deal of information about payday loans, some of it negative. Throughout this article we will explore the truth; examine the information out there and lay out some of the facts that the average person likely doesn't know. Let's look closer.
The most important things to know about payday loans is that they are short-term and expensive. Traditionally, the interest rate has been roughly proporrtional to the upper limit of the loan you can take out. For instance, if the upper limit was £1000, the interest rate may have been in the hundreds, if it was £200, the interest rate could be in the thousands. In January of 2015, the Financial Conduct Authority (FCA) introduced a limit to repayments, with a maximum of 0.8% of the value having to be repaid per day and a grand total of 100% of the value of the loan being repaid in interest and fees. If the loan is £50, you would never need to pay back
more than £100.
There are a number of companies that exist now, and another number that have previously been prominent but are now defunct/non-existant. Some of the lenders that are no longer around but that you may have heard of:
– Wonga – One of the biggest lender who went into administration in 2018
– Quick Quid – The UK’s biggest lender that closed as recently as late last year.
– The Money Shop – Closed mid-way through last year suddenly.
The regulations introduced in 2015 on payday loans obviously had a huge effect on not lenders in general, but even some of the biggest lenders out there. But it wasn’t the only factor.
Along the way, it became possible under FCA regulations to claim compensation against payday loans. Coupled with the regulations of 2015, this crippled lenders and the market is now vastly different than in the past. Some of the other lenders still in operation are:
- Satsuma Loans
- New Horizons
The dark history of payay loans
Many of the darker practices that take place within business only last for a certain amount of time before there is some sort of consequential reaction. For unassessed subprime mortgages,
you had the housing collapse of 2008-2010, for PPI, you had the mass compensation scheme. Payday loans have become subject to the same constraints from regulators that have seen the bad side to what they can do.
First and foremost, the modern history of payday loans can be traced as far back as the 90s. When they rose to fame, they were not only sold, but aimed, at those that had little chance of being able to repay. Another trick was limiting how quickly people could repay the loans, sometimes delaying the full repayment by months to maximise profits. The idea was to trap people in a cycle of indefinitely repaying the enormous levels of interest and never the loan itself. Of course, many, and perhaps the majority, of those that took out loans found themselves in this web, and the relatively insignificant financial troubles they had before spiralled out of control. What began as a stopgap until payday turned into a living nightmare.
A good way to get a string sense of the rise and decline of payday loans is through some of the key statistics that surround them.
1) In the UK in 2006, around 250,000 people used short-term loans
2) By 2012, the market share had grown to be worth £2.2 billion
3) It was not uncommon for firms to charge thousands of percent APR, but one loanee accepted a loan at in excess of a jaw-dropping 16 million percent! You read that correctly.
4) At present, 4 out of 5 payday loans are repaid within a month.
5) The biggest period of growth in the UK market was between 2008 – 2012.
6) In terms of demographics, the most likely people to take out a loan are; 25 – 30, single, employed, tenants but on low income.
You may be tempted to go with a payday loan in your time of need because, let’s face it, we all know them and we all know they are quick to get. Sometimes a little more time and research can save you money.
You don’t want to get caught in a cycle of using payday loans each month given how costly they are, so try to look for alternative. Do you have friends or family that can help you out? Responsibly using a credit card is an option too. Authorised overdrafts are almost guaranteed to be cheaper and we have stronger relationships with our banks too. What about a standard loan from a bank or similar financial institution? If you are looking to repay monthly this may not work, but if you are in a place of poor credit and looking to rebuild, a longer term loan with favourable interest may work better.
These are just some ideas. Whatever your situation, don’t just go with the first option you see because of convenience. Shop around.
If you were to seek advice independantly about whether or not to take out a payday loan, you would likely be told to look elsewhere first. We know that there are different solutions for different problems. A payday loan is best used as it’s namesake describes, when payday is imminent. But this always carries an element of risk with it. Wages can be late. Bank holidays and the like may extend your waiting period etc.
We would probably echo the sentiments of others. It isn’t that payday loans aren’t a viable solution, it’s just that they should probably not be your first choice. Those with poor credit may
find themselves without much choice, but there are always options. Use the time you have to seek advice from professionals, family and friends with experience and make an informed decision that’s right for you.
FCA 2015 regulations: https://www.fca.org.uk/news/press-releases/fca-confirms-price-cap-rules-payday-