Since 2006, the amount of Payday
Loans authorised has increased fourfold in Britain; despite the wide spread
stigma and wariness that is whispered against them. Their detractors consider
them risky and a trick, while their backers see them as fulfilling a gap in the
market for those who fail to establish better lines of credit. Whichever camp
you belong to, you cannot deny they split people down the middle and cause
hullabaloo whenever they are mentioned.
How do Payday Loans Work? The thinking behind payday loans is they are there to be
used for unpredicted crisis', as money is tight for everyone at the moment many
don't have an urgenency fund and/or can't get a credit line from the High St
Banks. The amount of time the loan will cover is as a rule expected to be days
or weeks and at most a month, the maximum amount loaned will be the full amount
of the monthly pay, though it's not unheard of for some of the companies to
offer a higher amount. Payday loans can be approved within thirty minutes to an
hour, the only criteria being you are in full time job and you have a bank
account. The process won't need a credit check and the only testimony necessary
will be a driving license, bank statement, a utility bill with your current
address and the last few payslips received. The regular course of action is
when the loan is accepted, you give them a post dated cheque which they will
cash on your payday, if you are in a severe state of affairs it is possible to
roll over the loan to the next month. This is not counselled though for reasons
you will soon read.
The Benefits of Payday Loans:The widespread view is that, if used smartly and for one off
situations while also budgeted correctly, they can be an effective tool and
bridge to the next payday. To show how hated payday loans are in the media, the
argument in their favour is actually more of a defence against the heaviest
criticisms, which is inevitably centred on the APR rate of payday loans.
Wonga.com is in general considered to have one of the lowest APR rates at
2,689% (at the time of writing) as well as being classed as the most
"ethical" of the payday loan companies. Such a large APR will
obviously push people away, yet when you look under the bonnet, it is not as
petrifying as it seems, to start with, APR stands for "Annual Percentage
Rate" the key word being annual here. It's hard to pinpoint the
exact average of the interest amount as it's merged under APR when the loan is
in reality only going to be for a few days or weeks, but it's around a third of
the amount lent, for example purposes we're going to use 30% as the mock up
interest rate. So for every £100 borrowed, add an further £30 as interest, can
you guess at what APR this will be? 2000% APR, doesn't sound right does it?
Let's measure it to an unsecured £5000 loan spread over 7 years, if the Interest
is also 30% of the loan the amount to be paid back will be £6,650, that would
total to £98 a month repayments...at 12.4% APR. So when compared to a more
conformist unsecured loan, an APR that stretches to thousands in percentage
points means very little when it comes down to details. If that wasn't enough,
on 16th October 2010 on BBC Radio's 4 Moneytalk program, an OFT spokesmen said,
in all but name, that Payday Loans are a necessary evil, if they were to be
more deeply regulated, or even forbidden, they would force people into the
"Unregulated Market", aka loan sharks.
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