The Pitfalls of Short-Term Borrowing and Pay Day Loans

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Millions are risking extortionate fees with short-term lenders. Image credit: David Playford

Consumers are struggling to manage their personal finances following a few years in a tumultuous economy.

So-called ‘pay day loans’ have been gaining increased exposure and, ultimately, popularity.

Despite some lenders offering Annual Percentage Rates (APRs) of over 4,000% (Wonga, the UK’s principal provider of short-term, instant loans, offers a typical APR of 4,214%), which translates to high interest fees, increasing numbers of people are turning to these short-term lenders for cash.

Payday Borrowing: Who Uses Short-Term Loans?

Although there’s no singular answer to account for the growing market of pay-day lenders, it’s believed that the general trend of increased living costs is pushing consumers towards short-term borrowing.

Shelter, the UK-based charity that helps the homeless, released results of a survey this year that suggests that around 1 million people in the UK alone used pay day loans last year to cover their rent or mortgage. That’s more than 2% of the adult population using the loan schemes to pay for accommodation, without even taking into account the loans taken out for other uses.

Payday Lenders: Preying on the Vulnerable

Campaigns are springing up across the Internet to stop this unregulated industry. With no caps on charges in place, pay day lenders are able to charge escalating late fees in addition to their hefty interest rates.

British Member of Parliament (MP), Stella Creasy, has been campaigning for government action to regulate the activities of what she terms “legal loan sharks.” She told Decoded Science of recent research into the spending patterns of short-term borrowers, revealing that “here in the UK we know one in three payday loans is taken out to pay off another payday loan, showing the spiral of debt users get into with them. The toxic mix of rising costs of living, wage freezes, and unemployment mean many find themselves struggling to make ends meet. Research shows the majority are for basics such as food, rent, or travel so it’s clear this problem isn’t going to go away.”

Payday borrowers are subject to uncapped fees and interest rates. Image credit: Sergio Roberto Bichara.

A key emphasis of her campaign is the belief that, as she told Decoded Science, “we need total cost caps set on credit to limit the amount of debt any loan could create to ensure what is supposed to be a short term solution to financial problems doesn’t cause long term debts for families for generations to come.”

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