The payday loan industry attracts a fair amount of criticism. The lack of solid legislation and the perception that lenders deliberately target vulnerable consumers has done little to improve the reputation of a practice that is still very much in its infancy – certainly as a mainstream alternative. However, with banks toughening up their lending requirements, should they be doing more to help those with poor credit ratings get money?

After all, the reason that most people choose to use a payday loan company is because they have been rejected by a bank or other long-term lenders. Therefore if money is needed urgently, many simply don’t have any other option.

However, the claim that banks should potentially be doing more to provide short-term loans assumes that current providers in this industry somehow aren’t already offering an effective or ethical service. In most cases payday loan companies operate with customer’s needs in mind and provide money to those with the biggest need.

Extortionate rates of interest are often cited as one of the major reasons why payday loans are unethical. On the face of it, you would find it difficult to argue. After all, your bank will often provide loans with an APR of 8 to 16%, whilst a payday loan is more likely to multiply these figures by over 150 times. Who wouldn’t think twice about borrowing at a rate of 2000%?

But this only really tells half the story. The failing of APR as a guide when it comes to short term loans is that it only ever shows what you would pay over the course of a year. This makes sense when you’re borrowing a large amount over 12, 24 or 36 months, but doesn’t always translate well when the lending period is drastically reduced – as is the case with payday loans.

The inconvenient truth for many is that payday loans aren’t actually all that much more than bank loans. With customers charged between £15 and £25 for every £100 they borrow, the actual rate of interest is hardly excessive. Now that’s not to say that most would prefer these rates to be lowered even further, after all 25% interest isn’t exactly cheap. However, it is certainly not as extortionate as some might suggest.

The major issue that blights the payday loan industry is that there are lenders who simply don’t have their customers’ best interests at heart. This means that they try to hide fees or charge people just for applying. This kind of unscrupulous behaviour does little to help with the reputation management of an industry that is dogged by criticism. It has also drawn calls from many quarters for banks to introduce a legislated alternative.

The big problem that surrounds short-term lending is one of risk. When banks approve loans, they will often only do so as a result of exhaustive credit checks and will use your assets as a form of guarantee. There is no such security for payday loan companies. By offering cash to those who are rejected elsewhere, they potentially have a lot more risk involved. Along with the reduced lending period, this is one thing that ensures rates of interest remain high. It isn’t in anyone’s best interests for them to lend to individuals that will default, but it does happen.

Whether banks can take on this risk is certainly up for question, in fact they may not even want to. So what about regulation? If trusted institutions can’t get involved and offer an alternative, should the payday loan industry be better regulated? Almost certainly, but that is the subject for another article entirely.

Vincent Rogers is a finance writer who writes for a number of finance businesses. For payday loans, he recommends Paydaypower.co.uk

Vincent Rogers is a finance writer who writes for a number of finance businesses. For payday loans, he recommends http://Paydaypower.co.uk

Author Bio: Vincent Rogers is a finance writer who writes for a number of finance businesses. For payday loans, he recommends Paydaypower.co.uk

Category: Finances
Keywords: payday loans, same day loans, loans, UK, finacne