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.