Payday Loans are no Answer to Credit Crunch
Is it Ethical to Offer High Interest Loans to Unemployed People?
Jun 22, 2009
Staffordshire County Council point out that, because of a recent tightening of US credit laws in a number of states, some American lenders may be coming to the UK because payday loans: “Exploit a loophole in existing UK consumer credit laws…”
These loans bypass existing laws governing credit because they normally involve less than four scheduled repayments. Money is often in the consumer’s bank account the same day, without the benefit of the normal ‘cooling off’ period.”
Short Term Loans
Also in the US, the Protecting Consumers from Unreasonable Credit Rates Act of 2009 is before Congress. If signed into law it would have a dramatic impact on some lenders, allowing them to charge interest of only 36% on certain short-term loans.
There is a certain inevitability that if this legislation does pass into law, more US lending organisations will want to relocate to countries with less stringent financial regulations. In the UK, the Office of Fair Trading is due to report later in 2009 on a year long investigation into payday loans.
Payday loans
Of course it’s almost impossible for the average consumer to know whether a company offering payday and other short term cash loans is from outside the United Kingdom or not although an occasional word spelled in the American way may point to the company’s geographical origins.
A trawl through a few of the nine million results that a Google “payday loans” search generates, immediately highlights a number of concerns:
- Payday loans come with a very high interest rate (APR). One company, which said its charges were the lowest in the market, had an APR of over 1,300%. Although others argued that using APR as a method of measuring interest was unfair because payday loans were normally repaid within one month.
A loan repayment table from one company explained interest in cash terms (Figures based on a 30-day loan):
- Borrow £80 repay £100
- Borrow £200 repay £250
- Borrow £500 repay £625
While many of the sites looked slick and professional and were upfront about their charges, others were not. A number of sites viewed were, for example, written in appallingly bad English, (possibly by someone whose first language is not English) with interest rates charges difficult to find.
Loan Products
Some of these less professional looking sites clearly targeted the most vulnerable and less financially astute in society and offered in addition to payday loans a number of other loan products:
- Loans for unemployed people
- Wedding loans for unemployed people
- Car loans for unemployed people
- Boat loans for unemployed people
- Loans for unemployed people with bad credit
- Loans for the disabled
Personal Debt
Although many would dispute the ethicality of certain types of loan,it is of course up to the individual as to whether they apply for any of the above loan products.
For those with high levels of personal debt and seeking help, the organisations listed below can offer free and independent budgeting or financial planning advice.
Consumer Credit Counselling Service (CCCS)
Credit Action
Citizens Advice Bureau
Sources:
Staffordshire County Council, Payday loans not the way to beat credit crunch, 21 January 2009
Office of Fair Trading (OFT)
Myra Butterworth, Pay-day loans offered with 10,000 per cent interest rate, Daily Telegraph, Dec 2008
A number of online sites, offering debt products, were trawled in order to provide material for this article.
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