Convenient Cash Companies or Credit with Consequences?
Payday loan companies seem to have exploded onto the financial services market in recent years, with Google offering 980,000 search results for the UK alone. Often also referred to as “short term loans” or “quick cash loans”, they are designed for emergency financial situations, generally between an individuals monthly pay dates, and should only be regarded as a short term financial solution.
Payday loans operate differently to normal loan brokers, in that their specified applicant criteria is far less strict, and often not carrying out full credit checks on applicants. Several top UK Sites such as Pay Day Loans UK, and Quick Quid promote the no-credit check advantage, additionally stating they will accept individuals with any form of credit history, from perfect to adverse. A worrying principle in itself. The loan companies generally do not assess your financial situation, or the expendable income you have. They offer their services on a “cash until payday” basis, meaning the amount you borrow is the amount repayable on your next payday.
For some people who are financially astute, and generally knowledgeable regarding their finances, Payday loans can be a welcome assistance when unexpected expenses arise, however for the less savvy or responsible, they can become a nightmare.
Payday loan companies generally operate with typical APRs of between 1200% and 2400%. These vary dependent upon loan amount required (usually £80-£1500). A typical borrowing of £100 over 30 days costs £130 to repay, however these rates double for every additional £100 borrowed, and obviously the more you require, the more you pay back in interest.
Many Payday loan operators actually act as brokers, or bridging companies to additional brokers. As a result of this, your application can sometimes be forwarded to affiliate and partner companies, operating under the same name or group. Whilst this may sometimes increase your acceptance prospects, it can also mean additional credit searches are made using your details, so that these companies can target you with additional products and rates. This is not to say that some companies are completely genuine, and only use your details to process your application solely with them.
The current legislation with these companies is also questionable, with top financial critics calling for tighter controls and regulations, as well as more stringent specifications for applications. This is to encourage responsible lending, as well as trying to regulate interest rates. These interest rates can also increase extortionately if you do not pay back your loan within the agreed 30 day period, and can land you in serious hot water in terms of your credit rating, and repayment amount.
Payday loans are very easy in terms of the application process. Faxing of documents is rarely required. The key requirements are:
* A valid bank account capable of direct debit
*A net take-home wage of £750 or over
* Employer details, time with employer and contact number
*Applicants must be over 18
Most people applying for these types of loans fit all of the criteria. The process involves a short on line form requiring usual name, address and telephone details, bank account details and employer details. Credit checks are rarely carried out, and this is perhaps one of the problems of this type of loan provider. They generally telephone your employer to confirm your employment and salary, and check you are the bank account holder. Basically your employer’s word and bank account confirmation, are as good as a positive credit rating to these companies. It is quite rare for the companies to request faxing of documents such as payslips or bank statements, and if they ask for a faxed copy of your actual credit or debit card, don’t even go there. They don’t need your card number and you could be opening yourself up to a scam artist. If they do require these documents, they will ask for them prior to sending your funds, in order to further confirm your application.
Payments made by the companies are advertised as being possible within one hour of application. Whilst this is technically possible using BACS or CHAPS payment (direct deposit) into your account, it can take between 4-48 hours before funds are cleared. Some additionally charge for CHAPS (around £25 admin charge) as it is a faster method than BACS. Your payment is released upon your signing of the credit agreement. This is usually done on line by simply typing your name into the signature box of the application, however very occasionally, paperwork is sent in the post to be signed.
From your receipt of payment, you generally have 30 days before which the total amount becomes repayable to your chosen company. They take payment by direct debit for the full amount, inclusive of the interest charged, and the date is usually communicated at the time of finalizing your application. Failure for the company to do so is both unprofessional, and problematic. They may try to take payment before your wages have cleared, leaving you with unpaid direct debit fees and additional bank charges.
Failure to Pay on Time:
Failure to have the correct amount of funds in your bank account, on the specified repayment date can have enormous repercussions for you financially. Loan companies are currently enjoying free reign in terms of the charges they can apply for missed payments, as well as the additional interest they can accrue from you. This is where the APR interest rate kicks in, and if you cannot pay within two months, you risk receiving defaults being recorded on your credit file, as well as your total borrowed amount doubling due to the crippling interest.
Advantages and Disadvantages:
Payday loans can be an ideal short term financial solution, perfect for difficult situations where unexpected bills become due, and are great for those who can afford to repay the amount the following payday, while still being able to take care of all other financial responsibilities. One of the main issues experienced by borrowers, is that they borrow large amounts (sometimes the exact amount of their next months’ salary) and when the loan becomes repayable, they are stuck in the same situation, yet also unable to cover their usual expenses. They default on the payment and the loan company sometimes allow the payments to be stretched over 2-3 months. If this happens, the interest increases and the borrower than has to budget quite substantially to organize their finances. This can have a ripple affect across a borrowers other financial commitments, leading to additional defaults or getting into debt with creditors.
The main problem, widely publicized regarding Payday loan companies, is their acceptance of adverse credit, as well as their lenience in terms of criteria. They do not assess a person’s financial commitments, expenditure, or expendable (spare) income, and therefore make their decisions without truly being aware of a person’s ability to repay them. This benefits these companies greatly as they earn off the interest you pay back, and the more you default, or struggle paying, the more interest they will get.
I would not recommend payday loans from my own personal experience. I have used two different companies on two separate occasions, and whilst I experienced no problems with the application and acceptance process (based on medium level credit rating), I encountered issues from the payment of the loan into my bank account, as well as issues when the amount became repayable. At the time of my application, the 28th of the following month was agreed as my repayment date. I didn’t envisage a problem as I am always paid on the 26th of the month, therefore the money would be in my account ready and waiting.
The problem arose when the company proceeded to try and take payment from my bank account on the 21st of that proposed month, seven days prior to the agreed date. I can understand a couple of days either side of the agreed date due to a weekend, however the 28th fell on a Friday. Obviously this resulted in several bank charges on my account due to having insufficient funds, and despite my contact with the loan company, they maintained the charges were due to my own disorganization.
Fortunately, I still had printed and email copies of my agreement, additional copies of which I made and sent to the loan company. The situation continued over two months, despite them re-applying to my bank account and successfully debiting the loan amount. They had charged me for failure to pay on time. It took several letters and emails (two of which were supposedly never received despite being sent by Recorded Delivery), and some threatening legal action written by my solicitor, before the company admitted they were at fault, and refunding £48 in bank charges as well as the £50 they charged me for supposedly defaulting.
It was only through persistence, and legal assistance from a family friend that I got my money back. I additionally had to request the default to be removed from my credit file so that my future credit was not affected. Other people are not so fortunate, and end up in a spiral of ever-increasing charges and mounting debt as a result of these loans.
My advice is to review your finances in great detail before you even consider using one of these companies. You could end up gaining more than you originally applied for!