Are Payday Loan Firms worth the Risk?

2 Oct

Payday lenders across Britain have felt the wrath of critics including the Archbishop of Canterbury as they come under fire for their extortionate fees and charges. Despite this criticism, however, many of these companies are still reporting record profits for the year as people have nobody else to turn to when they’re in financial trouble.

The Most Vulnerable are at Risk:

Adverts that offer large sums in a matter of minutes are often incredibly tempting for people who are struggling to make ends meet in either the short or long term. In addition to this, many short term loans companies have been criticised for encouraging customers to rollover their loans as this can the level of debt spiral out of control.

In addition to these short term credit risks, the long term effects can be damaging as well as, it can become more difficult for people to get a loan, mortgage, overdraft or even a credit card; especially if lenders differentiate between payday loans and high street loans when assessing your credit report.

For this reason, we have to note that there is a degree of risk when using a payday loan firm. As well as this, people also cite high rates of interest as being ‘unfair’ and ‘unreasonable’, but is this really the case?

APR in Perspective:

Although APR rates of around 3,000% may seem extortionate, they are also slightly misleading given the circumstances in which they are offered. Theoretically speaking at least, these loans are only designed for very short term borrowing.

Admittedly, however, if people use them as a long term borrowing solution if they’ve been denied credit elsewhere, these charges can add up to a more than substantial amount and the fee then becomes a worry.

The fees and charges that go into the typical APR rate are not in themselves a huge worry as, over a small period, the charge will still not add up to an unmanageable amount.  Ethically, however, we must challenge companies who are actively promoting a ‘rollover’ system as it can create a significant financial burden on the customer.

A Call for Greater Clarity:

Many payday loan companies have responded to a call for them to ‘clean up their act’ and are now offering a greater degree of transparency. Payday loan companies are subject to regulation from the Office of Fair Trading (OFT) and, since this summer; we have seen a huge crackdown on the way that they can lend resulting in many leaving the payday loan market.

This means that many of the so-called ‘irresponsible lenders’ have now left the market altogether. In addition to this, we have seen greater clarity provided by companies such as 1st Stop who clearly outline the loan process on their website, increasing consumer clarity.

To conclude, there are noticeable pitfalls if you choose to use a payday lender. Although many are accused of praying on the weak and vulnerable, greater regulation has led to an increase in clarity of late so as long as you consult a reputable company, you shouldn’t be caught out by any tricks.

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