David Prosser: People take out costly loans because they are desperate
Outlook What is to be done about payday loans? The research published by insolvency body R3 yesterday, highlighting the growing number of people relying on this type of credit, has prompted a predictable response: outrage over the cost of such finance and warnings that borrowers should avoid them at all costs.
Neither is much use to those in need of a payday loan. Borrowers with no money to feed their children or pay their electricity bill do not have the luxury of outrage. Nor do they have the option of going elsewhere: payday loan customers generally find traditional avenues of borrowing closed to them, with credit card lenders and banks reluctant to give them finance. An unauthorised overdraft may be possible, but often works out even more expensive.
Also, we do borrowers a disservice by ranting about interest rates of several hundred or even thousand per cent, for these figures are completely misleading. Consumer credit law requires all lenders to quote interest rates calculated in a standard way – the annual percentage rate – which shows the cost of borrowing over a year. Payday loans are meant to last for a few days only, so the APR isn't a useful way to describe their cost.
None of which is to say the growth of payday loans is not a problem – or even to argue that many of the companies in this businesses are not making fat profits from the trade. But before we consider heeding calls for caps on interest rates or outright bans, we should think about where people might borrow from instead. The answer for many is likely to be an illegal loan shark. Note too that payday loans, used responsibly and paid quickly, can actually be cheaper than other sorts of credit – and a useful way for borrowers to start rebuilding their credit histories.
We should not ignore R3's research. Better funding for debt advice charities has never been more desperately needed – and the Government's cuts to the crisis loan budget have hardly helped. Lenders may need more regulation – there seems to be little judgment exercised about who they lend to. But let's not pretend these companies do not fulfill a need.
- 1 Strictly Come Dancing 2014: Gregg Wallace joins line-up as final celebrities revealed
- 2 Notting Hill Carnival: Woman shares selfie after being ‘punched in face for telling man to stop groping her’
- 3 Keira Knightley topless: Usually conservative actress does own take on #Freethenipple campaign for Interview Magazine
- 4 Oil tanker with $100 million cargo goes missing off Texas coast
- 5 George Galloway left with severe bruising after attack in Notting Hill by man 'shouting about the Holocaust'
YouTube video posted by Isis militants shows 'execution of 250 Syrian soldiers'
Keira Knightley topless: Usually conservative actress does own take on #Freethenipple campaign for Interview Magazine
Oil tanker with $100 million cargo goes missing off Texas coast
George Galloway left with severe bruising after attack in Notting Hill by man 'shouting about the Holocaust'
Brother and sister, Christopher Buckner and Timothy Savoy, arrested for 'committing incest after watching 'The Notebook''
Robin Williams Emmys tribute led by Billy Crystal criticised for including 'racist' joke about Muslim woman
The Rotherham child abuse scandal is a tale of apologists, misogyny and double standards
Scottish independence TV debate: Pumped-up Alex Salmond bounces back in bruising second round against Alistair Darling
What do immigrants really think of Britain? Polish immigrant's Reddit post goes viral
Do you realise just how foolish the UK looks?
Ukip Douglas Carswell defection: Tory MP jumps ship to join Nigel Farage
- < Previous
- Next >
iJobs Money & Business
£35000 per annum: Harrington Starr: Network Engineer (CCNP, CCNA, Linux, OSPF,...
£50000 per annum: Harrington Starr: DevOps Engineer (Systems Administration, L...
£60000 - £70000 per annum: Harrington Starr: A prestigious leading professiona...
£50000 per annum: Harrington Starr: Financial Technical Consultant (C++, C#, F...