UK Payday Loan Industry Grows Under Tight Regulations

A total of £1.2 billion is borrowed in the form of payday loans every year in  the UK as approximately 1.2 million people use them a temporary means to get by.  The short term credit industry enables borrowers to quickly access small loans  meant to cover emergency expenses, such as car repairs. Most short term credit  companies keep a steady eye to the regulations and are committed to keeping the  industry healthy and offering consumers a useful tool to manage financial  shortfalls.

While it is sadly the case that a certain seedy underbelly does exist in the  industry, a 2010 report found that some short-term borrowers can find using  payday loans a positive experience, provided the loan is paid off in the  short term. The same report concluded that: “there is currently no clear  evidence that banning payday loans necessarily helps consumers avoid financial  difficulties. Indeed, the loans can have advantages over some other forms of  credit. For example, they can be cheaper than unauthorised overdrafts (which are  outside the consumer’s control in terms of whether or not they are granted). It  is also possible that, if they were to be removed from the market place, illegal  lending could prosper” (Keeping the plates spinning – Perceptions of payday  loans in Great Britain, Marie Burton, 2010).

It’s a fact that individuals who cannot manage their finances responsibly use  the short term credit services, knowing full well that they will not be able to  repay the loan come payday. However, short term credit is a useful tool to those  who find themselves in an emergency situation, or even those without access to  mainstream credit options. The bottom line is this: payday loans are meant to be  a temporary solution. It’s true that the interest rates are high, and can even  look exorbitant when viewed in light of annual fees. When fees are viewed in a  one to three week timeframe, though, the rates become much more reasonable.

Another way to put the fees in perspective is to compare them to the rates of  a high street shop credit card: some cards charge as much as 26% in annual  interest. These fees can become unmanageable in a very short period of time.  What’s worse is that most cards are not up front about their charges and the  amounts can come as somewhat of a shock to cardholders. In contrast, the UK  payday loans industry is held to some of the highest regulatory standards in the  world. The terms of the loans must be clearly stated and understood, and the  regulatory framework is under constant changes in order to protect  borrowers.

Because of the lingering distrust of payday lenders, mainstream banks  traditionally have a tenuous relationship to these companies. Recently, a major  bank adopted a new policy and announced that it would no longer service payday  loan companies. This may appear as a silent critique of the industry; however,  the very same bank has launched its own short-term