The amount of people borrowing on short term or payday loans is rapidly increasing. The total lending about in 2009 in the UK amounted to 1.2 billion pounds. It has been noted that two-thirds of borrowers of short term loans have annual incomes below 25,000 pounds and that the average loan size is about 500 pounds
What are payday loans?
Payday loans originally started in the United States but the idea spread rapidly and has become popular, for example, in the United Kingdom. The amount loaned is usually small, between 50 pounds and 500 pounds. There are no restrictions on the interest rates which payday loan companies are allowed to charge but they are required by British law to state the effective Annual Percentage Rate (APR) at all times. Very often payday loan companies charge higher interest rates than it would cost to obtain a loan on the “High Street” but this is because payday loan companies face higher rates of default and fraud. Naturally it is incumbent upon borrowers to check the credentials of the company from whom they borrow and also to check the interest rates, transparency and reliability of the payday loans company from whom they borrow.
At present the payday loan industry is generating about 20% of the total lending in the United Kingdom. The loans are typically small, on average around 500 over a period of one month. It is important that borrowers understand that if the loan is not paid back in good time the interest can escalate way out of proportion and all kinds of problems can follow on from this.
The Consumer Credit Act in the UK
According to the Consumer Credit Act of 1974 lenders must have a licence from the Office of Fair Trading (OFT) in order for them to be able to offer consumer credit. The Consumer Credit Act 2006 requires the OFT to consider irresponsible lending in its evaluation of whether a lender is fit to have a licence. There are no restrictions placed on the interest rates which payday loan companies can charge nor are there any restrictions on rolling over loans.
In June of 2010 the Office of Fair Trading published a review of high cost credit and in this report they concluded that changes could be made to the industry but that more radical approaches would be required if the British Government wanted to come to grips with the wider social, financial and economic context in which such high cost credit markets are able to exist in the UK. In 2013 the OFT published an update relating to the industry and noted that many lenders failed to work out whether people could afford the loans and that there were aggressive debt collection practices and a failure to explain how repayments are collected. In 2014 the government expects that there will be greater control over what they call rogue lenders. Legitimate lenders applaud this development.
Often one is desperate to get out of a credit crunch but it is important to make sure that by borrowing, your situation does not become worse. Always make sure that if you borrow money you can pay it back. Always use a reputable payday loans lender and check their interest rates and check that they have a license.
Payday loans are becoming more popular because they are accessible and quick to obtain. Because the loans are so small there are few restrictions on the borrower except that the loan is paid back on time. With the current world economic problems many people are in a credit squeeze and if managed correctly, payday loans, or short terms loans, can be very helpful.