Consumer Law Blog
The Payday Loan Trapby Elliot 04 November 2009
In this quick fix, fast food, everything on-demand culture we have become accustomed to getting exactly what we want and getting it instantly. This trend has now passed on to the world of personal finance in the form of payday loans. But whereas a Big Mac might make you feel a bit queasy for a couple of hours, a payday loan can send you into a never ending spiral of massive debt and distress.
For the uninitiated, a "Payday" loan is a short-term loan worth between £50 and £750 that tides you over until you next get paid by your employer, at which point the loan is paid back in full in a single payment. Sounds pretty reasonable so far right? That is until you discover the typical APR on these loans regularly stands at somewhere between 2,000% and 3,000% - a truly eye-watering and shocking amount.
the typical APR on payday loans regularly stands at somewhere between 2,000% and 3,000% - a truly eye-watering and shocking amount.
This means that a loan of £200, for example, could end up costing you £260. Ok, this doesn't sound too terrible at first but the thing is with payday loans is that the repayment often causes a hole in the borrower's finances for the following month, prompting them to get out another payday loan, and then another etc. etc.. If a payment is missed then the interest goes into overdrive, ensnaring the borrower in a vicious circle leaving them thousands of pounds of debt.
This Payday loan trap has claimed scores of victims but unfortunately it looks like nothing is really being done about it. The companies continue to entice desperate people with slogans such as "QUICK CASH" and "ALL APPLICATIONS ACCEPTED" while the regulators look the other way.
In other parts of the world, however, the financial authorities are putting the boot into underhanded payday loan companies.
For example, local governments in Canada have begun to cap payday loan interest rates and fees so that the total cost of borrowing can never exceed a certain amount. In Quebec they have limited APR to 35%, effectively putting payday loan lenders out of business.
As evidenced by the payment protection insurance and mortgage endowment scandals (to name two), the regulators in this country usually take so long to close the stable doors that not only has the horse bolted but is probably retired in Spain somewhere. Let's hope the government sits up and notices the growing menace of payday loans before it's too late and thousands more people are sucked into a world of debt hell.
If you are already struggling as a result of payday loans then please consult our guide for tips and advice on how to escape your debt nightmare.