- Personal Finance
Payday Loans: Are They Scamming Us?
The last year or two has seen a massive increase in these so called ‘Payday Loan Services’ which offer short term loans for up to a month or so in order to tide a person over until they get paid. However, the question remains of, are they a scam?
Whilst on the surface these loan services may look professional they are in fact one of the biggest scams out there. With interest rates that can sometimes reach 2000% it would seem that these loans companies make a huge return out of lending a small amount of money. They are however totally legal (in the UK anyways) and operate inside regulations. Still though, in my eyes these companies are a massive rip off. Heres an example of how...
Say for example, you need to borrow £250 over the period of 30 days. This may seem like a large figure to borrow in 30 days but you have to remember that this can be done. Anyways, say you borrowed this at an interest rate of 4214% (which is what payday lender Wonga charge currently)...
£250 over 30 days at 4214% (Plus fees) = £331.10
So in 30 days Wonga would take £81.10 in interest and fees. Surely, this doesn’t seem like a good deal to you. That’s equates to paying back nearly a third of what you have borrowed to the payday loan man. The maximum that a new customer can take out in one go on this website is £400. If I took that out over 30 days it would equate to £125 in interest and charges which in my mind is simply ridiculous. It could turn into the situation where you have to borrow the next month in order to pay the previous months debt. Potentially, a situation could occur where the interest rates can cause the amount to spiral out of control and the person just owes more money each month.
In the UK there are currently calls for these companies to have tighter regulation after the government received numerous complaints from unhappy people. The interest rates for these companies are pretty much at the highest end of the loan scale. Perhaps then they have just replaced the criminal element of money lending and tried to make it seem more legitimate. By this, I mean that it is no longer one of the shady regulars down your local pub that you borrow money off (with the threat of broken kneecaps upon non repayment), now these criminals have websites and fancy TV adverts trying to sell us the joys of short term loans. Of course this is exaggerated, but it sometimes feels that way having seen the way that these things can take control of your lives.
However, are there any situations where it would be advisable to use these companies...
Should I Ever Use Them?
My advice on this one would be to only use them as a very last resort. They are what I would like to term as a ‘legitimate scam’. In other words, they are totally legal but yet we all know them to be total scams. It’s not me just saying that either. We all know someone who has used one of these. I have even heard stories of people becoming thousands of pounds in debt to the payday lenders and having to use debt consolidators to pay these off just to stop the ridiculous interest rates that occur.
Therefore, I would like to reiterate this point again. Only use payday lenders as a very last resort. I’d perhaps even rather go to the bank and borrow a slightly larger loan (say £1000) but pay it back over a year instead. At least through doing it this way you will only be paying back a fraction of the APR. I think the last time the bank tried to offer me a loan it was just under £200 I would have had to have paid back in interest over the whole year. I’m really not sure if even that is a good deal. It is still a damn site less than what you would have had to have paid had you gone for the short term lender.
Perhaps the only other justifiable use of them would be if you wanted to borrow the money over a very short period of time (i.e. 4 days). In cases like this, the charges would not be too bad (although still seemingly ludicrous considering how much you borrow). Borrowing anything over say 10 days seems a silly idea to me due to the fact that those charges will just get out of hand.
Have You Ever Used A Payday Loans Company?
Please vote, as I feel it would be interesting to see the number of people that have used one of these companies...