Are PayDay Loans really evil?

Jan. 26, 2009 - PRLog -- The recent explosion in the number of people seeking short term PayDay loans (also known as PayDay advances) has lead to calls from some that providers of these short term credit facilities are simply exploiting those experiencing financial hardship in the name of profit.

Payday loans offer a simple, hassle free method of obtaining short term credit in order to cover any financial emergency that may arise. Granted, the annual percentage rate or cost of the loan is very high, but one must keep this in perspective. Typical rates for PayDay loans are around £25 per £100 borrowed over a period of not more than 31 days; this represents an APR of around 1800%. Extortionate some may say, but how does this really compare with for example, a credit card at an interest rate of 17% APR?

If you were to take out a PayDay loan of £500 you would repay £625 on your next pay day. This represents an actual cost for credit of £125 or 25% of the amount borrowed at an APR of around 1800%

Were you to borrow that same £500 using a credit card and then make the minimum repayment each month until the debt is repaid, you would be making monthly payments of around 2% (starting at approximately £10 and reducing monthly thereafter); at this rate it would take a colossal 199 months to repay the debt, by which time you would have repaid a total of £1,243.82, which represents a total cost for credit of £743.82 (this figure DOES NOT include any additional payment protection insurance premiums you may also be required to make) or 148.76% of the amount borrowed, although the APR would of course still be 17%.

Even worse, you could try an unauthorised overdraft from your bank. For this type of facility, you could face a monthly charge of up to £30 for dipping just £5 into the red; in real terms, a £5 overdraft could cost you £360 per year in fees, not forgetting the original fiver, plus interest at the banks special "unauthorised lending rate".

Of course, these are completely different credit products all with their own different terms, conditions and repayment periods, but it does illustrate the point that financial products cannot be judged using the same benchmark and that a lower APR does not necessarily represent a lesser amount to be repaid to the credit company.

To those who accuse PayDay loan providers of exploitation, I would simply say that it cannot, in all fairness, be right to judge a product that has and continues to help ever increasing numbers through short term financial worries as exploitative or extortionate if in the end, the customer is happy with the product and the service that he or she has received, particularly given the fact that the would be applicant is supplied with ALL of the facts prior to any application being made (including the APR and the real cost of the loan) leaving them free to make their own decisions about whether or not the product represents value for money.

In a world of ever contracting credit availability from the high street, just how are "normal" people supposed to help themselves through short term financial strife.

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Typical APR 1845% - ALL LOANS ARE CHARGED AT £25 PER £100 BORROWED and repayable on your next pay day.

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