This week has seen payday loans come under criticism from debt advice groups who claim that some companies are charging excessively high interest rates on this type of loan. The debt advice groups are calling for a cap on interest rates for payday loans however, the Office of Fair Trading (OFT) responded to this by stating that payday loans would be covered by investigations of the issue of responsible lending and that although the loans, often used by people to tide themselves over until they get their wages, generally attract high rates of interest, the businesses offering them are properly licensed, professional and responsible.
U.S. payday loan providers also responded to the criticism by explaining that higher interest rates are levied on payday loans to reflect the level of risk being taken by the lending companies.
As one would expect, the payday loan companies claim they are providing a valuable service to customers who may be unable to get credit elsewhere. However, this claim is supported by the rapid rise in popularity of the products offered by the payday loan companies as they provide a real alternative to unauthorised overdraft charges, pawnbrokers and loans from friends or family.
Payday loans do not involve a credit check and for this reason they are sometimes referred to as bad credit loans. No credit check means that these cash advance type loans are therefore available to those who are unable to get other forms of credit such as credit cards, traditional long-term loans or overdraft facilities. The loan companies do however require proof that the applicant is currently employed and that their next pay cheque will be more than sufficient to repay the loan in full.
Many payday loan customers report that by getting a payday loan they are able to resolve their immediate cash-flow crisis and buy themselves a little bit of breathing space in which to assess their finances and to get advice on how to manage their money better.