Payday loans have evolved over time. Ten years ago they were treated with scepticism and mistrust, we believe this was for two reasons:
- Their generally high rates of interest
- The fact that the lender didn’t ask too many questions of the customer.
We understand why people were sceptical, but if you break down these two above reasons, you’ll soon find that payday loan companies were justified in their business model and here’s why, starting with the first, then second reason.
Busting the myths
Any legitimate and law-abiding payday loan company is bound to the same laws as any other lender in the US. The rates of interest they charge are approved and signed off on by the Financial Conduct Authority (FCA) before they are released to the public. This means no payday loan company that’s trading legally and ethically is able to charge more than the FCA say they can, so any aspersions about them attempting to rip off customers are patently false.
Payday loan companies may charge a higher rate of interest than some long-term borrowing options, but that’s because they are providing a quicker, more streamlined and bespoke product to customers. The customers who require a payday loan are not looking for a long-term payment plan. They generally need the loan to resolve an existing and ongoing crisis, they’ve not got time to go through the usual channels.
As for the second point, loans from a payday loans company are also beneficial for those who have a poor credit rating and are looking for a way to build their credit rating back up. By being accepted for credit due to a payday loans more lenient criteria, they can borrow small amounts and pay it back in a short space of time. In this case they don’t mind and expect a higher rate of interest because they are getting what they need. Most traditional lending options won’t touch people with a bad credit score, so for them a payday loan can be a godsend in a time of need.
The two reasons for scepticism are also inaccurate too, especially by todays standards. Now by comparison, payday loans charge a similar rate of interest to most leading credit cards and long-term credit solutions. As time has gone on, the legislation that governs them has progressed, and their own market has become more competitive, it’s no longer an effective strategy for payday loan companies to charge higher rates of interest than normal. If they did, they’d never attract customers.
Payday Loans Scale
A bespoke product
Payday loans are usually associated with smaller portions of cash. Figures around the $100 to $500 mark are indeed the most common payday loan amounts. Those looking for a larger amount have been encouraged to seek out alternative lending methods. However this has created a gap in the market. It’s true that most people looking for a payday loan only need a small amount, perhaps the boiler broke two weeks away from payday and the customer needs to call out a plumber to fix it. This may cost a few hundred dollars. It’s not ideal, but it’s unlikely to cause them serious financial concern in the long run.
But what if the boiler is unfixable and the plumber can’t repair it? All of a sudden this problem becomes much more expensive. This is why $1500 loans now exist. They operate in exactly the same way as a payday loan does, but the amount is higher and there are new ways to pay it back.
It’s hard to class a loan of $1500 as a payday loan, most of us don’t have a payday that gives us a spare $1500, so it’s unlikely the amount will be paid back in one payday. In this case it’s largely up to the customer to tell the loan company what they can afford each month. In cases where the customer has poor credit rating it may be necessary to set up a guarantor. This isn’t always ideal, but to those who have a bad credit rating it beats being declined for the loan.
A $1500 loan still operates like a payday loan for all intents and purposes, although it does share several features with traditional long-term loans. Luckily they still retain all the advantages of a payday loan which is what makes this such a popular option when some people are in need of financial assistance.