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What Are Payday Loans? 


I've been hearing an awful lot about payday loans recently, both from friends that have taken one and in the newspapers. My friends have been talking about these for a while and on the face of it, they seemed like a really good idea. A quick, small loan to cover emergencies and unexpected bills, then as soon as your wages or pension comes in, you repay it. But then I found out about the interest.

What my friends had neglected to tell me was that they were paying upwards of 1700% APR on these loans! Now, if you are only taking an online payday loan of £100 or £200, and have enough disposable income to pay back the loan and interest at the end of the month, then this sort of loan seems useful. But of course, if you have enough disposable income to pay back £25 per £100 borrowed in interest, it is unlikely you would need to take one of these loans in the first place.

No, these loans are designed to trap people in cycles of debt and make them ever more reliant on another, larger quick payday loan at the end of the month. Most of my friends, being of the older generation, have been sensible with these and only taken very small amounts that they have paid back once by sacrificing certain things the next month. Yet two are now trapped in what seems to be an never ender vicious cycle in which they are being practically robbed every month.    

The UK and Payday Loans

The UK government has been put under a lot pressure to ban or restrict payday loans, particularly now in the wake of the commercial success of the UK's largest payday lender. While the payday lending industry has been growing like a greedy parasite for some time now, politicians have been reluctant to acknowledge it or the debt epidemic it is creating. Payday lenders like the one mentioned often charge in excess of 1800% APR interest on their loans, yet this hasn't stunted the growth of the industry. The lender in question has national television, internet and billboard advertisements, has extended its service to small business lending and will soon float shares on the UK stock market.

Official statistics show the number of people using payday loans rose from 300,000 people in 2006 to 1.9 million in 2009, with the number of users thought to be at 3 million mark today. The UK's biggest trade union has stated that 12% of its members use fast cash payday loans in order to pay their bills and that most who have are now trapped in a never ending cycle of borrowing misery. Basically, the UK is becoming infected by the payday parasite.

The Office of Fair Trading (OFT) is currently investigating the industry, but as many have observed, they will find it very difficult to place restrictions on an industry so closely modelled on every bank and financial institution out there. And this is the crux of the problem. Payday lending is 100% legal: payday lenders are breaking no laws, contravening no regulations and they are legally allowed to charge as much interest as they want. Yes, that is the LAW. Thus, the OFT can only investigate the industry's advertising practices, and if it receives any penalties or has any restrictions imposed, it will be on who they target and how. As we have seen from restrictions on tobacco advertising, the effect of such measures are limited. Sadly, as we still have people dying from tobacco related lung cancer, we will still have people being made bankrupt by payday lending if advertising restrictions are all that is imposed on payday loan lenders.