Payday loans are meant to be just that; a loan from payday to payday. These are short term loans which are unsecured. A payday loan is designed for the person who needs a little extra cash to tide them over to their next payday. As soon as the next payday arrives they will pay back the loan in full or it will be deducted by the payday loan company. This short term allows the pay day lenders to operate at quite high levels of interest but if the service is used in the way in which it is intended to be used which means paying back on time, there will not be a problem. Problems begin when a payday loan is taken and it is allowed to roll over into the next month and even the month after that until the interest overtakes the actual loan itself. This is not how the loan is intended to be used and registered and reliable payday lenders do not intend to entrap their clients by allowing them build up interest which they cannot repay in this way.
It is estimated that more than 4 million pounds were taken out in loans in the last year by more than 1 million people in Britain from payday companies. The Office of Fair Trading sees nothing wrong with the practice. Payday loan institutions are not likely to be going anywhere soon.
The question being asked is this; is there a better solution for those people who are not using a payday loan the way in which it is intended to be used?
It is possible the answer lies in Credit Unions. This is a new which is being used as an alternative to the payday sector. The Credit Union is a government initiative which is being backed by the Church. The Archbishop of Canterbury and the Most Rev Justin Welby would like to see the Church assist credit unions to assist those who should not take out payday loans because they have no way to pay them back on time.
Credit unions are unique because they are owned as a kind of financial co-operative by the people who use them. Members are initially encouraged to deposit savings into the union and this can be done quite easily by using a debit order. The savings are protected as in any other financial institution of up to 85,000 pounds, in case the union goes bust.
Loans can be taken out from the unions and the amounts can vary from 1000 pounds to a full mortgage. Interest rates are quite low, usually around 2%. It is anticipated, however, that this strategy could lead to drawbacks because the credit unions would perhaps not profit enough to be able to compete with the quick processing time of payday loan companies. The government is looking at raising the interest rate to 3%.
As the UK Government will be pouring 36 million pounds into this project, the hope is that Credit union membership will swell to over two million in the next year, taking from the payday firms those who are using the service for a quick fix to a larger problem and not as the payday scheme is intended to be used; a quick cash source for those who can pay it back just as quickly.