Payday Loans: Time for Action
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Returning to a topic I have covered before on this blog, debt advice groups have this week renewed their call for action against payday loans and their extortionate interest rates.
For those who have not been paying attention, payday loans typically involve a lender advancing a customer cash, usually for a month, against a post-dated cheque. The Office of Fair Trading (OFT) has said they would are covered by investigations of the issue of responsible lending.
Although the loans, often used by people to tide themselves over until they get their wages, generally attract high rates of interest, the businesses offering them are properly licensed and claim to be professional and responsible.
The companies claim that the high interest rates simply reflect the risk involved. American companies own many loan shops, and hundreds have opened in the UK after some state authorities capped the rates they could charge in the US. There is discussion that similar action needs to be taken here to stop vulnerable people being abused.
Normally I would not advocate such intervention in a market but it is clear that market forces are failing in this case. Some of the loan companies have lent money at a rate equivalent to almost 2,000% annually.
The actual rate involved is usually hidden by using monthly rates that appear much lower.
National Debtline, a helpline for those in debt, said that the credit crunch meant that people were looking at alternative forms of borrowing. If they can’t get another credit card balance transfer, they will start to look at other forms of borrowing, which could be payday loans or pawnbroking, which are quite expensive.
With the OFT making advances with its work against unfair bank charges it seems that it is right to begin to take payday loans seriously and stop these companies ripping off consumers.
