Banks and financial experts tend to be very skeptical about payday loans. The UK Guardian has also been printing a series of articles informing customers about the pros and cons of payday loans but most of their articles seem to have a negative spin to them. Irrespective of the articles, pay day loan companies are having a healthy run with more business then they can handle. Business is up with more and more lenders taking loans from pay day lenders. For example, £100m was lent in the year 2004 and the amount has increased to about £1.7bn in the year 2010. That means that irrespective of the hype, payday lenders are doing a good job. Are they really as bad as stated? If they are so bad, they why are they so popular? Whey don’t banks offer the same type of payday loans if small independent lenders are bad?
Let’s just find out.
The good points:
- Pay day lenders provide loans for customers who have bad credit histories. However, the tragedy is that such customers have to take on more loans and pay them back on time to be considered as good customers. With a bad credit history, conventional lenders will not lend to the customer and payday loans are the only option. As a result, customers have started bypassing banks completely in favor of smaller payday loans no credit check websites that are reliable and trustworthy.
- Instant approval and sanctioning of payments is another really good feature. Most banks take more than a month to approve any kind of loan. Short term loans are never approved as they tend to have no profit for banks who want longer term loans spread out with an appropriate interest rate. The shorter sanctioning time and cash dispersal makes these pay day loans seem really popular with customers. Moreover, customers can ensure that the loan is repaid just as quickly.
- Interest rates are higher but there is a catch here too. If you take a £100 for a month, you usually have to repay it as £125 depending on the interest rates. Most companies charge about 1350- 1450% a year. However, this interest rate can be compared with long term loan which are actually higher that a pay day loan. The benefit here is that you are paying off your loan quickly and efficiently in the shortest period of time.
This means that for bad credit customers, a pay day loan is feasible and worth it. Customers can get a loan and repay it quickly without any problems. The Guardian also reported though that more than 93% of pay day customers were happy with the lenders. They also stated that the lender treated them with respect and dignity. More than 89% of the customers also stated that payday lenders explained their policies, fees and the repayment process correctly. In fact, most customers were happy with payday lenders and their services.
Why the negative vibes?
The problem arises with the consumer. Most customers are well aware of the interest rates and the repayment date and the repayment amount before they sign the contract. Consumers who borrow more than they can pay back inevitably land up rolling over the loan. This is not a good idea. Pay day loans are short term loans and they are not meant to be rolled. Defaulting on a payday loan is also bad as you will not get any more pay day loans from other lenders as well. Almost 90% of all customers pay their loans back on time, it’s the defaulting 10% which give payday loans a bad name.