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Payday Loans Are Legal

Are payday loans legal?

Are payday loans legal? Find out for yourself...

The question over the legal nature of payday loans has been passed to-and-fro between politicians and financial regulators ever since this form of short term loan hit the UK, back in the early Millenium.

Payday loans have been called into question largely due to their large Annual Percentage Rate (APR) and the fact that most payday loan firms are willing to lend to people with poor credit, previously unheard of in the unsecured loan market.

Payday Loan APR – Why It’s Misleading To Customers

It’s important to remember that a payday loan APR is subjective – it’s essentially a short term loan that’s taken out over the course of a month. This means that the APR (which is measured over a 12 month period) is actually misleading to customers.

Payday loan regulations state that an APR needs to be clearly displayed on the company’s website. The only real problem with this is down to the fact that a customer will usually repay the loan by the end of the month… so the interest accumulated will be a fraction of what the actual APR is.

For example, you will end up repaying £125 back – this is only at interest rate of 25%. This is a minor amount compared to what you would repay on a yearly loan. In fact it’s equivalent to a standard unsecured loan with a 25% APR.

Payday Loans – For People With Poor Credit

Payday loan companies can and do lend to people with a poor credit history. Let’s face it – many people go through a tough time and it’s not always their fault. They may have lost their job or had unforseen expenses they may not have been able to meet. Payday lenders don’t believe these people should be discriminated against because of a mistake or an unfortunate circumstance.

This is why payday loan firms will lend to customers with poor credit scores. They will accept a customer’s word that they will repay the loan at the end of the month and will make concessions if the customer struggles to repay it in one go. This is usually referred to as a deferral – where the payday loan repayments are split down into monthly manageable repayments.

Payday lenders are not demons – they’re not there to charge you bucket loads of interest at the end of the month. Essentially, as long as you’re honest and up-front with them, payday loan firms can be very understanding – or at least as understanding as a lender can be.

Quick Short Term Loans Easier To Obtain Than Ever

Applying for quick, short-term loans has never been easier. With more and more payday lenders and other providers offering quick loans through the internet, obtaining a loan can, in many cases, be even easier. You could even get the cash into your bank account on the same day you apply for it!

Whilst payday loans get a lot of bad press it’s worth bearing in mind that they do serve an essential service to many people, especially those with poor credit scores, unable to take out credit cards or other types of loans.

It’s not always easy to balance your finances when there are so many bills and other outgoings over the course of the month, possibly made even worse by other unexpected costs (for example, your car breaking down).

When you don’t have access to credit cards or an overdraft facility on your bank account and you’re being faced with unexpected costs it’s important to have something you know you can rely on. Applying for a poor credit loan or payday loan could help you to bridge that gap until your next payday.

To find out how you can improve your credit score why not check out our other articles:

What is a credit rating and how does it effect me?

Five top tips to improve your finances

Checking your credit score and keeping it high

Are payday loans really that bad?

A lot of bad press has been written about payday loans in the last few years, and much of it is unwarranted in many respects.

Not everyone has a good credit rating and many of us simply can’t get the credit or loans we need. Payday loans could fill that gap – they give you access to an almost immediate source of finance. In some instances you can apply for a payday loan and receive the funds in a few hours.

The main criticism that payday loans come up against is that they are too expensive, however, they could prove to be a far cheaper option than many forms of loans or credit cards.

Payday loans have received a lot of bad press recently due to the fact that they are measured by the same APR (Annual Percentage Rate) system as if they were a longer term personal loan.

However, it’s worth bearing in mind that payday loans are NOT a long-term loan and are purely designed to run for around a standard month, after which you simply pay the loan, and the interest accrued over a month, back. Paying off a payday loan quickly can prove a far cheaper option than letting a credit card debt accumulate.

Logbook Loans – what are the benefits?

Logbook loans can be a good, quick way of getting a badly needed loan that doesn’t require credit checks.

With unsecured loan companies and banks tightening their lending criteria, due to the UK’s fragile economy, it can prove very difficult to obtain badly needed credit.

In recent years payday loans have been the only small value unsecured loan available to people with a poor credit rating. Fortunately, logbook loans can offer a higher value unsecured loan that is simply secured against the value of your car.

A logbook loan can be obtained within hours of apply for it. This type of loan undoubedtedly appeals to anyone who has had difficulties in previously obtaining credit.

In many instances a payday loan simply cannot offer sufficient funding for the majority of people who badly need a loan and have proven unsuccessful in applying for a regular unsecured loan.

Logbook loans, being secured against the borrower’s car’s logbook, which the loan company retains, are usually offered on much better terms than a payday loan, since they prove less of a risk to the lending company.

For more information about loans why not read our financial glossary or check out some of the financial products available on our site.

Rogue personal loan brokers target the vulnerable

The Citizens Advice Bureau (CAB) issued a stark warning after tens of thousands of vulnerable people have been tricked into handing over large amounts of money by cold-calling rogue credit brokers and debt management firms.

The CAB stated that consumers who are struggling financially are being targeted by rogue finance companies who contact them to offer to help find a loan.

The group went on to reveal that people who have been victimised by these firms were charged large up-front fees for the service. However, the loan frequently failed to appear and they were unable to get the search fee back.

This is a relatively unethical practice as most finance brokers that charge finders fees only retain the amount if they find a loan for you. However, in these cases it was found that, after the cold-caller took the applicant’s bank details they found that money had been withdrawn from their account without their consent to do so. In addition to this their contact details were passed on to other finance firms and were bombarded by spam calls, emails and text messages as a result.

Unfortunately, people who find themselves in a position where they are unable to borrow money from banks and other mainstream lenders due to poor credit scores tend to be targeted by finance brokers offering sub-prime loans and credit cards.

As a result the CAB have lodged a super complaint with the Office of Fair Trading (OFT), asking it to ban finance firms from cold-calling and charging up-front fees.

Chief executive of the CAB, Gillian Guy, commented:

“Our evidence suggests that rogue operators are cashing in on the desperation of people hit hard by the recession who are least able to afford it, and that this problem is set to grow much worse.”

Ms Guy added that there are too many loopholes in the consumer protection framework about unsolicited marketing and broker fees, allowing “bad practice to flourish.”

Creditwindow advises that if you do apply for a loan through a broker you should always check whether:

1. There are any up-front fees and check whether or not you get this back if the broker fails to find you a personal loan.

2. Read through any contract thoroughly before signing – make sure you know what you’re getting yourself into.

3. Most importantly – don’t get pressured into taking out a loan if you have any doubts whatsoever. Remember – the broker is in it for the business – not for your best interests.

Payday Loan Firms Could Have Interest Rates Capped

A new legislation has recently been suggested to cap the amount of interest charged on payday loans.

A number of British MPs, including Stella Creasy (Labour MP for Walthamstow) and Justin Tomlinson (Conservative rep for North Swindon) have both voiced their concerns and proposed the motion earlier this month.

Recent research has indicated that around 1.2 million Brits take out short-term payday loans every year, to tide themselves over until they are next paid. Research also suggests that the payday market has seen fourfold growth over the last two years since high-street banks and other lenders have tightened lending.

The MPs’ primary concern is that many poorer consumers, unable to obtain other forms of credit such as overdrafts or credit cards, are “sitting ducks” for payday loan companies who, in some instances, can charge large amounts of APR interest on their loans (sometimes around 2000%). In addition to this customers who either miss re-payments can be hit with extra charges and punitive fees.

Commenting on this, Ms Creasy commented:

“People who are shut out of mainstream credit are sitting ducks for these companies. There are so few of them dominating the market that there’s no proper competition.”

She added:

“We also need the banks to play their part in ensuring access to debt management and counselling and help more people access affordable credit through credit unions and the post office. I’ve brought forward legislation which if passed will protect not only consumers in Walthamstow but across Britain from these legal loan sharks. I hope the Government will recognise the need to act and back these proposals.”

It’s thought that the Commons backbench business committee tentative discussions in January could go to a full hearing by Febuary next month.

In spite of this, consumers should also bear-in-mind that an APR rate is measured across a 12 month period and, since payday loans are usually re-paid within a month, this high-rate does not actually apply. Nine times out of ten the majority of payday lenders are transparent in the way they do business.

Group urges stricter control over payday loans

Banks are being urged to offer affordable short-term loans as alternatives to the more expensive payday loans, by consumer watchdog, Consumer Focus.

According to the group the total number of people taking out high interest payday loans has quadrupled over the last few years. The study shows that around 1.2 million people have borrowed over £1.2 billion in loans.

Consumer Focus added that better safeguards need to be put in place to help protect customers from spiralling payday loan debts.

Financial Services Specialist, Marie Burton, commented:

“With the credit crunch, demand for short-term borrowing has significantly increased despite the eye-watering interest rates charged by some payday lenders.

“Such expensive rates can leave consumers who defer payments, or take out repeat loans, caught in a debt trap.”

In spite of this, Ms Burton added that the group does not agree with calls to ban payday loans as outlawing them could leave many borrowers vulnerable to the likes of loan sharks. However, she added that safeguards to protect borrowers needed to be put in place to prevent them from becoming too dependent on this form of high-interest credit.

Bank of England keeps interest rates at all-time low

The Bank of England have recently opted to keep base interest rate levels at 0.5%, due to concerns over the fragility of the UK’s economic recovery.

Keeping the base rate as low as what it is could potentially be very good for people looking to obtain credit cards or personal loans with a low rate of interest. It also bodes well for property first-time buyers looking for a competitive mortgage.

The Bank’s Monetary Policy Committee’s (MPC) decision to keep the base interest rate at the lowest recorded rate on record, suggests that they do not see high inflation levels as a major concern, in spite of inflation levels being well above the recommended level of 2%.

Many economists, including Nida Ali at Ernst & Young, believe that the Bank of England has made the right decision in keeping base interest rates. It’s been suggested that interest rates need to remain low to help the economy recover, especially with public spending cuts that are expected to adversley affect economic growth.