With family budgets being squeezed as the recession drags on, many more people are looking to short term pay day loans to help get them through the last part of the month.
Pay day loans are short term borrowings that get repaid in a matter of days rather than months or years. Typically they are for relatively small amounts but the amount borrowed can range from £100 to £15,000.
Pay day loans have become more popular recently as they can, in some instances, be cheaper than incurring unauthorised overdraft banking charges. Ironic as this may seem, customers are seeking refuge in a poorly regulated market as they seek to avoid the penal charges incurred by banks on exceeding their agreed overdraft or paying a fee to have the overdraft terms extended.
Chris Tapp, director at Credit Action, is acutely aware of the challenge being faced by consumers. He says that people just do not realise until it is too late just how expensive an unauthorised overdraft can be. Marc Gander of Consumer Action Group agrees and says that it is disgraceful that those struggling the most with the ravages of the recession are being hardest hit by bank fees.
Research by the Daily Mail in February 2010 showed that a typical pay day loan for 10 days would cost between £20.44 and £37.50 dependent upon company. In comparison, Lloyds TSB would charge £216.32. Alliance & Leicester and Halifax both £50 and Santander £51.06. HSBC was cheapest at just £0.75 (first offence) followed by RBS and Nationwide (both less than £21).
Payday loans have been popular and widely used in the USA for many years. There are moves afoot to regulate the industry more tightly and limiting the rates of interest charged has already come before the regulatory authorities in many states. Research conducted in Colorado in support of their legislative changes showed that 60% of payday loans were repaid late The typical customer was a 37 year old single female. Average loan sizes were small at just $366 which attracted an average charge of $60.68. Each loan had an average period of 17 days to pay off.
Regulators in many states are proceeding with legislation to control a fast growing industry. Lending in the UK to consumers is already regulated by the Financial Services Authority.
With general credit and loans harder to get from traditional lenders due to their tightened criteria in response to the financial crisis, cash strapped consumers are looking more and more to easy to get sources of credit despite the charges levied. With the number of people taking part time work increasing and with wages in the private sector being held down as companies struggle, many families overcome their cash shortfall by borrowing to get through the month.
What families are neglecting to do is go back to basics and budget according to their income. This old skill has been largely lost as we got used to the easy credit market and continually increasing wages of the 1990's and early 2000's. Getting to grips with expenditure is probably the hardest aspect to grasp for a former free spending family. Sitting down and planning what to cut and how to economise is not easy and can be painful but the financial rewards are worthwhile. Getting back within the available budget relieves stress and eases the pressures on personal relationships.
All families should challenge their spending. Cutting out non essential items such as gym memberships generates cash for essentials such as mortgage and utility bills. Making full use of comparison websites will ensure that you get the best rates for gas and electricity. Using zero balance credit card transfer deals will also create valuable free cash – but with many card companies becoming wary of those that change too frequently this should be done no more than once per year.
Payday loans do have a valuable place as part of a family's financial planning. They allow you to meet unexpected short term cashflow problems quickly and reasonably cost efficiently. The application procedures tend to be quick and simple with credit searches conducted quickly. Small loan amounts may not even require a credit search. Loan periods are generally less than 31 days and the money is transferred into your main bank account. The balance, plus charges, is debited from your account at the end of the loan period. Typically quoted APRs can look horrendous (up to 1800%) but this is a function of the short term nature of the loan and the level of charges. Be careful to compare all offerings before selecting your provider since default or extension terms can be penal.