Ever since their introduction to the UK loan market payday loans have been surrounded by controversy, whether thats regarding their interest rates, debt collection practices or marketing campaigns.
Just last week The Telegraph posted an article explaining how more and more payday loan customers are struggling with out of control payday loans. Last year the debt charity received 17,500 enquiries from payday loan borrowers; in the first three quarters of 2012 the same charity received over 25,000 seeking help, and expects this figure to rise to over 30,000 by the end of the year.
In the same week The Telegraph published an article explaining that a well-known insolvency trade body has released the results of research showing that; up to £4M will turn to payday loans over the Christmas period. When you take into account that payday loans are solely designed to tide borrowers over until their preceding payday, using them to fund Christmas is not what they are designed for and could essentially leave you with greater financial problems than before.
With payday loans constantly being on the wrong side of negative press, many have asked the question; are payday loan providers lending responsibly?
When you are applying with any other subprime personal loan (e.g. guarantor loans, logbook loans or instalment loans) provider then its highly likely that youll be subjected to a number of checks in order to assess the suitability of the loan. For example; most providers will assess your income and outgoings in order to calculate whether you can afford the loan repayments alongside all current credit commitments, and to ensure that they are abiding by their responsible lending policy.
In order to provide a service that allows payday lenders to offer a same day payout, all checks involved in the processed are automated. This means that providers are technically unable to accurately assess whether the applicant would be able to afford the loan on the scheduled repayment date.
Payday loans have also been in the centre of the media limelight recently due to their interest rates. It is no secret that payday loans are generally charged at rates of 2000%+, however after investigation the OFT decided that this was simply too high and a cap should be put on the rates. This is currently being assessed by the government.
The figure that the rates get capped too will have a large bearing on the future of payday loans. I feel that if they were to be capped to less than 1000%, we would see the payday loan market go into meltdown. This is because the majority of payday loan providers actually make a loss on each loan due to the administration costs involved, they make their money when customers are unable to pay and interest starts to accrue.