I must admit that I’ve never been enamoured with the idea of Payday loans. When you see APR’s above 2000% you tend to think that they are nothing but a rip off. However….
The Office of Fair Trading has been putting Payday loans under the microscope and much to my surprise, the OFT has actually come down in favour of this type of short term lending, even at those exorbitant interest rates.
It was only when I thought about it in more detail, that I realise that actually these loans do have a legitimate place in the loans market and, in fact, their charges are not as unfair as they at first seem.
This is because they are meant to be short term. They are for people who need cash straight away to pay a very pressing bill or debt. To tide them over until they get their next pay check, hence the name.
Without this, people in dire straights could end up in all sorts of trouble – home repossessed, bailiffs at the door, resorting to loan sharks. That sort of nasty situation.
So if you are borrowing a pay-day loan of £300 for 10 days this could cost around £35 which represents a 2690% APR but it is still less than a £50 fee for an overdraft or the overall cost of a late payment charge, according to Olivier Beau de Lomenie, MD of The lendingWizard.
“In recent times, people have been falling behind with their credit repayments and higher rate credit repair loans is sometimes a way to get your credit profile back in order. It can also be an option to ensure your balance is reducing (vs. making minimum repayment which will only marginally reduce your level of debt)”. Beau de Lomenie adds.
So Payday loans have passed a critical test and have actually proved their place in the loans market, at last in the eyes of the OFT. I for one am changing my mind about them, but only if they are used as a last resort and are only for the very short term.