These days it’s hard not to come across payday loans. You see adverts for them on TV, the Internet and even newspapers and magazines. The chances that a friend or family member will have used them is also high.
The concept of a payday loan is simple. If you’re strapped for cash, you might still have a couple of weeks until you get paid. To bridge that financial gap, you could borrow a short-term loan. Or, as you know it – a payday loan.
Some experts feel the rise of the payday lender is thanks, in part, to the global economic downturn. But, one interesting fact that we’re noticing is the decline in their use. Here’s a fascinating insight into some of the reasons why that is so:
High interest rates
The main criticism of payday loans is the interest rates customers get charged. Often, people end up paying more money back than they’ve borrowed. That’s especially so if you cannot repay the money back in time, or you “extend” the loan.
Even if you paid back the money as agreed, you still pay a lot of interest. For example, let’s say you borrow £400 over 30 days. You could end up paying almost £100 just in interest! In comparison, a high APR credit card is significantly cheaper.
Little help if you can’t pay the money back
The industry as a whole receives a lot of criticism about their debt collection tactics. Sometimes people struggle to pay the money back, especially if they’re on a low wage. Default fees and debt collection charges can turn a small loan debt into an astronomical one.
Avoiding the temptation to borrow more short-term loans
The fact is many people take out payday loans because they are struggling with money in general. They view them as easy solutions to immediate problems. But, all they do is hide the source of the original problem.
As a result, people would borrow more than one payday loan to meet their monthly commitments. The downside to that approach is a rather negative one. It causes a downward spiral of debt, with little hope of recovery.
For those with out-of-control debt, it makes sense to view better alternatives. One example would be to consider a debt consolidation loan. It’s better than taking out several payday loans and avoids last-resort options like bankruptcy.
Financial education, along with more market choices, means people are avoiding payday loans. Instead, they review and apply for alternatives that offer better value.
The payday loan industry was pretty much unregulated until the government stepped in. After much public outcry, of course! Nowadays, payday loan interest rates get capped. That means they don’t have the freedom to charge stupid amount of interest to their customers.
Of course, with the government stepping in, it looks like the future of the industry is bad. The reason payday loan firms grew was because of the high interest rates they charged. With a cap on what they can charge, the market has shrunk.
DISCLAIMER: These articles are for information only and should not be construed as advice. You should always seek advice prior to taking any action.