To understand what is a payday loan you must know its origin. The payday loan is not a new idea, it has been is use for hundreds of years. The notion of a payday advance has been utilised by many people and cultures throughout the world.
But in 2008, the world experienced the credit crisis. This event forced banks to not only restrict the total amount to be borrowed but tightened the criteria lending requirements. As many people who had ever had a late payment on a bill or loan had their chances eliminated by the fact that banks and high street financial institutions stopped lending money to people with a poor credit rating. Banks would also disapprove of any new lending to people who had no credit history.
This created a market in itself, a demand for accessible credit, a demand left by the banks inability to facilitate the needs of many hardworking people.
Entrepreneurial thinking was needed and the payday loan was reinvented
A payday loan is a loan designed to be repaid over a very short period of time and to be used as an emergency method of acquiring credit. The loan was created to get people through financial hardship between pay cheques. The loan amount was lent to a customer and paid back once he or was paid by their employer.
The normal duration of a small loan for bad credit is typically up to 30 days. One of the payday loans advantages is that it can be accessed via the internet. This technique allows for fast approval and completion of application with money being transferred in the customers account in as little as 15 mins.
The flexibility of payday loans allows the customer to choose the loan period and amount in a click of a button. Most payday lenders are contactable via phone, website and now through the use of mobile application technology.
The payday loan is a is the evolution of a the pay cheque advance, digitalised for todays fast paced lifestyle and accessible to the nearly everyone regardless of their prior mishaps.
Criticism of payday loans
From MP’s to journalists and comments from the public. The criticism leveled at the loan lenders repeats itself like a merry-go-round. Crusaders like Stella Creasy are never short of an insult for the sector. The payday loan industry has been expanding rapidly with millions of users around the world and the high street establishments are not accommodating for the masses. From this, I have to ask, is the criticism warranted or just bitter swings at the new tall poppy?
The days of being hounded by banks and supermarkets to choose their credit cards are over. No more alluring letters with luxurious of champagne bottles and beautiful women sporting energetic smiles adorn the letterbox. The banks stopped lending and the accessibility of credit cards were reduced by tighter eligibility requirements. A hole was created and the payday loan filled it.
A simple, fast and unrestricted lending platform was implemented to be accessed by anyone with a job. Sounds simple enough, so why the fuss?
Lets start with the interest. The interest charged for most 30 day payday loans averages out at around 25%. This amount simulates the risk to the lender, as no other forms of collateral are attached. But this is not the problem. The problem lies in the OFT and FSA rules that state all lenders must show the annual percentage rate (APR). The APR works well for loans over a year or a long period of time, but falsely represents the true charges and fees over the shorter intended periods. The payday annual rate of interest soars into the thousands and the media eat it up hook line and sinker.
Following this, words such as predatory start to be splashed across media forums. The press are associating payday lenders with entrapment practices designed to lend to the poor and keep them in debt. This is far from reasonable and far from the truth. Over 80% of customers repay their loan on time. Couple that with the strict lending policies, that do not allow people without the means to pay their loan back, you can see that payday lenders do not work to adopt customers with no means of re-payment.
Like fast food outlets situated on shopping streets and at service stations, payday lenders choose to advertise where the majority of working class people are. Wonga was recently crucified for sponsoring Newcastle United, a move seen as unethical as the region is seen to be less prosperous than others. I wonder if the critics would have an objection if Wonga sponsored Chelsea?
At the end of the day, the payday loan employs thousands of people, services millions and supplies a product that has no alternative when comparing efficiency, cost and accessibility.