A Payday loan ( paycheck advance in the US) are small, short term loans, available more-or-less straight away for mainly people with low credit scores or people who need quick cash, until their next pay cheque.
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Payday Loan History
Cheque cashing stores were the first businesses…
The first to offer payday loans were cheque cashing outlets broadening their products range.starting around the 1920s when many American companies began to pay their employees by cheque, rather than in cash. As banks of the time didn’t want to entertain lower income people or faith in the banks was low,payday loans had a niche market particularly in inner city and other deprived areas.
As the faith in bank increased, payday loan companies were forced to move into ‘salary advances’ proving more popular and profitable.
Payday Loans in the UK and the Internet.
Payday loan lenders are relatively lightly regulated in the UK, at present, but some debt councillors and politicians are calling for stricter controls on payday loan lending to be introduced.
To trade legitimately in the UK as a payday loan provider, you must have a consumer credit licence, issued by the Office of Fair Trading (OFT). Advertising, either online or offline, must display the Annual Percentage Rate (APR) for the loans offered. With these in place, payday loans can be offered.
Payday loan Benefits
- Previously paid Payday loans, paid on time will increase your credit score, making another loan more likely.
- Repeat payday loan customers have an easy time getting repeat loans. Applications are normally approved immediately and the money is transferred speedily into borrowers’ bank accounts, sometimes even on the same day.
- Existing customers have an easier time deferring loans.
- Previous customers who have no other credit lines, will usually get instant money.
- Payday loan companies make a loan application very easy. They pride themselves on friendly, personalised service, unlike the impersonal call centres operated by some larger financial institutions.
- Some payday loan websites are not lenders in their own right. Instead, they act as brokers that attempt to match borrowers to lenders in order to get an appropriate deal for both parties. This can benefit the customer to get the best deal.
Overview
‘Payday loans in the United Kingdom are a rapidly growing industry, with four times as many people using such loans in 2009 compared to 2006 – in 2009 1.2 million people took out 4.1 million loans, with total lending amounting to £1.2 billion. The average loan size is around £300, and two-thirds of borrowers have annual incomes below £25,000. There are no restrictions on the interest rates payday loan companies can charge, although they are required by law to state the effective annual percentage rate (APR). According to Consumer Focus, “the cost of obtaining a loan online (often £25-£30 per £100) exceeds the costs of obtaining a loan on the High Street (often £13-£18 per £100)” because they reject more applicants and face higher rates of fraud and default.
The payday loan industry generated around £242m in revenue in 2009 – around 20% of the total lending. The largest lender is Dollar Financial Group (which includes The Money Shop and Express Finance), which provided around a quarter of all payday loans in 2009. In February 2011 Dollar Financial additionally acquired the largest British Internet payday lender, Payday UK, and suggested The Money Shop’s network could grow from around 350 shops to around 1200.’
PayDay loans are usually loans over a period of 31 days. Usually it works out around a £25 fee for every £100 you borrow. Payday loan companies usually require a debit card details as the way to collect payment and security.
Payday loans companies, due to popularity, have made it easier to gain a loan, sometimes available to take over to the next month for payment.
The most important think to bear in mind with Payday loans, is to pay back as soon as possible.
Write this on your forehead if you have to and plan before you borrow.
They work well if you have no other lines of credit or just need short term cash, but they can become costly, quickly due to the immediate nature of the loan. So treat them for what they are – short term access to cash that needs to be paid back as quick as you borrow!
Regulation
The are no restrictions on the interest rates payday loan companies can charge, but advertising of payday lending is subject to the Consumer Credit (Advertisements) Regulations 2004.[7] This means that the “typical APR” must be stated in adverts which meet certain criteria, such as adverts which indicate that credit will be given to customers who may otherwise find access to credit restricted.[8] There are no restrictions on rolling over loans.
In June 2010 the Office of Fair Trading (OFT) published a ‘Review of high-cost credit’. In this report they concluded that changes could be made to the industry itself, but that “more radical approaches would be required if the Government or others wanted to tackle the wider social, economic and financial context in which high-cost credit markets exist.”
To get a good idea of the size and range of payday loan companies operating in the UK, comparison sites are a useful tool, as recommended in the OFT report – “We recommend that the Government works with industry groups to provide information on high-cost credit loans to consumers through price comparison websites. If this cannot be undertaken on a voluntary basis, the Government should consider the case for introducing legislation to create a single website allowing consumers to compare the features of home credit, payday and pawnbroking loans alongside credit unions and other lenders in their local area.”
Wikipedia page on PayDay Loans.
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