As new research reveals that 3.5 million adults are considering taking out a payday loan in the next six months, personal finance journalist Naphtalia Loderick explains why she recently took out a payday loan.
Payday loans receive a bad press but new research by insolvency trade body R3 reveals that 3.5 million adults are considering taking out such loans over the next six months.
R3's research also shows that of those sampled who had taken a payday loan, 60 per cent regret the decision and 48 per cent believe the loan has made their financial situation worse.
Only 13 per cent believe the payday loan had a positive impact on their finances.
I fall into the 13 per cent. Yes, I took out a payday loan and it was only a few months ago. And yes, I am a personal finance journalist. How embarrassing!
Sticky financial patch
Yes, it is a bit embarrassing to admit and I only told a few close friends at the time, but it got me out of a sticky financial patch.
I’m speaking out now because payday loans are regularly slated in the press and I don’t think it is wholly deserved.
Admittedly, if you take them out month after month it is sure to end in financial disaster for you.
But if you are looking for a short term cash boost then it could be right for you. As it was for me.
Why I took a payday loan
This September, after two holidays and a lot of birthday celebrations, I had too much month left at the end of my money.
I knew there was no point approaching my bank for a temporary overdraft – despite having banked with them for more than 16 years and earning a relatively good salary, anytime I have asked them for a temporary loan, invariably, the computer says no.
And I knew my friends and family couldn’t help – everyone is pretty strapped for cash these days.
So I ventured into The Money Shop on my local high-street. I brought proof of address with me and a recent bank statement. A few minutes later I walked out with £100 cash.
Interest rates
Yes, the interest rates on payday loans appear extortionate. But, probably like most people who take out payday loans, I wasn't looking at the APR. We’re assessing the cost of borrowing in terms of cash you have to pay back.
In my case, I borrowed £100 and had to pay back £125. I was happy to borrow on these easy-to-understand terms.
I think many people talking and writing today about the scourge of payday loans forget there is a whole swathe of society who can’t borrow from the banks and don’t have credit cards.
Loan sharks danger
These are the people who often turn to payday loans. But I don’t think the answer is to ban payday lenders as this would leave a whole section of people potentially turning to loan sharks.
Indeed, Consumer Minister Ed Davey recently said people turning to loan sharks is why he ruled out a cap on store card and credit card interest rates.
But wait – I work, I have a regular salary, a bank account and a credit card. Yet mainstream lenders won’t even lend to me – even for a short time. I think people always think it’s only the poor who turn to payday lenders, but I think many more professionals like me do as well.
Preying on the vulnerable
However, I know that payday lenders aren’t perfect. After I had borrowed once, I was called a day or so before the £125 was due to be repaid to be told that I could extend my loan for another month and I could borrow up to £350.
I know that payday lenders operate a business, but trying to get repeat custom by tempting vulnerable (because they are short of cash) borrowers into more debt is not right.
The consumer watchdog Consumer Focus is rightly worried about the marketing practices of payday lenders and has called for a restriction on the number of loans borrowers can take out in a year to five.
Consumer Focus has also, rightly I think, urged banks to do their part provide more short-term loans to cash-strapped customers.
What do you think? Have you or someone you know ever taken out a payday loan? Do you think they have a place in the market or should they be banned?
And what role to banks have to play in the matter – are banks to blame for refusing to lend to customers. Or do the public simple need to get a better grip of their finances?
