Payday loans have their place – but not at any cost

I do not understand why legislation does not seek to prevent the extortionate charges and interest rates being permitted for any lender. Payday loan companies are, it seems to me, loan sharks who are allowed to advertise.
Why people deal with them is beyond me. What we should be doing is not giving them a cloak of tacit approval, but helping those in need of monetary assistance by setting up sensible means of giving them advice and assistance on how to manage their finances better. This might be a more productive role for government rather than perpetuating legalised extortion.

I was pleased to read the announcement that the government intends to introduce legislation to impose a duty on the FCA, rather than just enable it, to regulate the pay day loans market and to control not just the interest rates but the overall costs of borrowing, including ‘arrangement fees’ and penalties. The usual resistance from the industry – “It’ll drive people into the clutches of illegal lenders”, and so on. . . . Why?

It has been amply demonstrated that many loan companies have been exploiting borrowers. There’s enough margin in the business to enable lenders to make a decent return without exploitation and extortion and to extend credit to people who might not otherwise qualify under more conventional terms. Maybe some applicants will get turned down because they cannot be relied upon to repay a loan; the industry’s preference for whacking people with punitive interest rates in return for an unsustainable loan is not acceptable. At least if all other loans are made illegal as a result of this new legislation, and any duress used in settling unpaid debts made a criminal offence with a heavy penalty, such a loan would become unenforceable. Nevertheless, that does still leave a worrying risk of threatening or menacing behaviour and possible physical violence by or on behalf of illegitimate lenders, and society has to find ways to combat that, to protect people who are vulnerable to such threats, and, as Malcolm says, to put in place support mechanisms to foster responsible financial management.

What ever legislation is used to manage short-term loans it is vital that it does not result in a expansion of the illegal loan-shark business.
Any lender setting up a loan will incur costs and expenses and it is important that these are reasonable and set out separately from the interest element for transparency purposes.
Obviously the shorter the loan period the higher the % cost of the loan e.g. it probably costs the same to set up a 5 day loan as to setup a 5 month one
Using APR as a means of comparing loans of vastly different lengths is generally unhelpful and often used by the media for hyping a story or campaign.