If you’ve seen a feature on payday loans in the media during the last few years there’s a good chance that it was largely negative. As a result, public perception of the industry is equally unenthusiastic. However, is this bad reputation fully deserved?

The ethics of short-term lenders are often called into question because of the high interest rates that they charge. This criticism isn’t without some basis either; however, it is often warped by misguided views of the actual cost of borrowing.

When you see an APR of 1,500% or more on any form of loan, it’s completely natural to question why it’s so high. After all, the current interest rate from the Bank of England stands at a mere 0.5% (correct as at February 2012), so how can lenders justify such a hike?

The truth is simply that APR isn’t necessarily the most accurate measurement for payday loans, or indeed any form of short-term credit solution. Whilst it would be an exaggeration to claim that it is entirely misrepresentative, it perhaps doesn’t give the clearest indication of the likely cost to a borrower.

For instance, if you were to take out a £1,000 loan for 12 months with your bank and they charged 10%, you would pay £100 in interest. However, if you were to take out a payday loan for £200 with an advertised rate of 1,500%, you wouldn’t end up paying £3,000. In fact, you are far more likely to be charged nearer £50. Confused? Well, let me explain.

APR stands for Annual Percentage Rate, as such it reflects the amount charged over the course of a year. Unlike other forms of lending, payday loans are only available for restricted periods – often a maximum of a month. Therefore, by applying a full year’s worth of interest, it distorts the figure by a significant margin.

The 15 to 25% you’re likely to be charged is still over and above most other forms of credit, but not by a huge amount. So perhaps interest isn’t the big issue here?

Banks and other institutions have come in for a lot of criticism ever since the financial meltdown. However, this pales into insignificance compared with the payday loan industry. There are many who consider payday loan companies to be bottom feeders, taking advantage of the most desperate borrowers. But again, this something of a misguided perception.

Sure, there are some people who get into difficulties as a result of being unable to repay the loans, but this is true of almost any form of borrowing. Consumers default on mortgages, fail to pay off credit card debt and overlook personal loans all of the time. As a consequence, most will be charged a set amount and receive a black mark on their credit rating. The same is true with payday loans.

The only major difference is the fact that payday loans are charged either on a daily or monthly basis. As a result, charges and added interest can spiral out of control within just a few months, making it increasingly difficult to repay. This is why it is so important that borrowers understand what it is that they’re signing up for before applying and don’t take undue risks.

However, it is important to remember that for many people, payday loans offer the only realistic borrowing option. With banks unable or unwilling to help millions of consumers, they are forced to either miss payments on existing debt or source a payday loan. It might not be many people’s preferred option; however, for some it is their only one. Does this mean that they are intrinsically bad?

Vincent Rogers is a freelance writer who writes for a number of finance businesses. For Payday Loans, he recommends Payday Power Loans.

Vincent Rogers is a freelance writer who writes for a number of finance businesses. For Payday Loans, he recommends http://www.paydaypower.co.uk Payday Power Loans.

Author Bio: Vincent Rogers is a freelance writer who writes for a number of finance businesses. For Payday Loans, he recommends Payday Power Loans.

Category: Finances
Keywords: Payday Loans, Payday, Loan, Loans, Short Term Loans, Finance, UK