Payday loan companies have become increasingly prominent in recent years, grabbing a much bigger share of the consumer credit market and displacing more traditional lenders such as building societies and banks as they have done so.
What are Payday Loan Companies?
Payday loan companies – also known as payday lenders and payday loan lenders – are financial institutions that specialise in offering payday loans. These are short term loans that are often transacted in a few hours, hence their alternative name of same day loans. The name ‘payday loans’ is reflective of the fact that these loans are usually for relatively small amounts, and are often scheduled to be paid back in a relatively short time; because of this, borrowers often take them out before pay day if they are short of money, with the intention of repaying the loans once they have been paid.
Payday loan companies’ main target market is those borrowers that have difficulty in obtaining credit elsewhere. Difficulty in obtaining consumer credit can be for a variety of reasons, but the main one is that the borrower has a bad credit rating. Because of this, a selling point for some payday loan companies is that they don’t always assess the customer’s credit rating when offering same day loans; no credit check being taken can mean that a borrower can get a loan when their credit rating might indicate they would not normally do so.
This policy of offering credit to many who may have debt and credit problems means that the interest rates charged by payday loan companies are extremely high: sometimes loans can be offered with an APR of thousands of percent. In addition to this, accompanying loan charges can be very high. All of this can combine to make even small loans barely affordable.
Criticisms of Payday Loan Companies
Due to their lending practices, there are many criticisms aimed at payday loans companies. The first is that the interest rates they charge are prohibitively high; indeed the rates they charge are so close to those charged by unlicensed lenders that they have been called legal loan sharks.
Another criticism is that payday loan companies are willing to lend to borrowers that have little chance in paying off the debt, whether they check the borrower’s credit history or not. When it comes to paying off the debt, borrowers in this position often take out another larger payday loan; the result is that can happen multiple times, meaning a small debt can mushroom into a much larger debt very quickly, leading to serious debt management problems.
Alternatives to Payday Loan Companies
For these reasons, borrowers should look at all possible alternatives before taking out short term loans from these lenders. Local credit unions specialise in helping those with a poor credit rating, and some banks, building societies and online lenders provide loans and credit cards specifically design for people to build up their credit rating so they can access more competitively priced credit in the future. It is also advisable to assess the services offered by peer to peer lenders, as they can have more favourable lending criteria.
Those that are in debt and thinking of going to a lender such as a payday loan company for credit should first seek out some of the free debt advice offered by a variety of charities and government bodies. Many of these organisations can offer help with debt consolidation and management, and will not charge a fee for their service; this is in stark contrast to the payday loan companies that profit from offering extortionate credit terms to those that will have great difficulty affording repayments.