When payday loans were first introduced they were brought out as a means of simply allowing a borrower to take out a loan until they next got paid. Typically the loans were small amounts, around £100 or less & borrowed for a maximum period of up to 31 days.
The loans have always been an expensive means of borrowing, with APR figures into the thousands of percent. However thankfully the APR doesn't necessarily reflect the true interest of what you will repay on the loan.
Why APR doesn't necessarily reflect the true interest.
pay day cash loan, no bank account loans, Payday Cash Loans 24/7,
Need Money? Let Me Help You
Take advantage from the innovative CreditGraph lending technology today.
APR is a figure that demonstrates the cost of a loan over a year long period, it doesn't only take into account the interest of the loan but it also includes any fees included too. Since a payday loan is designed to only be taken out for a maximum period of a month, to generate the APR figure the actual interest rates & fees of the loan have to be multiplied several times - this is what produces that ghastly figure you see advertised on lenders websites which is typically into the thousands of percent. In actual fact the interest rate you'd probably expect to repay on a payday loan over a period of 1 month would be around 25%, or £25 on £100.
So why do lenders display the APR if it's not relevant?
Well to start with, APR is still relevant and shouldn't be ignored because it demonstrates just how expensive the loan actually is.
As to why they display it, they display it because it's a requirement by UK law for any person or company lending money to display the APR of their loans to their borrowers. Whether they lend the money out for a day, month or year they've got to show it. APR is a useful figure to use if you wish to compare loans, since it includes all the costs involved with the loan.
So what's the danger with these new "supersized loans"?
Well, the reason you don't repay anywhere near the APR advertised is because the loan is taken out for such a short period of time. However now lenders are bringing out more flexible loans over periods of 3, 6 and 12 months - the problem is they are not necessarily bringing the APR figure down.
The longer you have the money out for, the closer you will get to repaying that ghastly APR figure that's advertised on the lenders website.
So what can be done?
Well, I believe that the best and most viable option would be to limit the duration of time a loan over a set APR can be taken out for, you can find an example of what I mean below:
So let's say all loans under an APR of 300% have no duration cap, whilst loans over that APR figure have a duration cap of 31 days.
It's just my personal idea anyway, but with the new FCA takeover who knows it may be something that eventually gets put forward.
Capping interest rates - why it's not a feasible option:
The trouble with capping interest rates on the loans is that whilst it may seem like the most obvious option, it will inevitably be the borrowers that suffer. The reason that these loans are so expensive is because they are designed for subprime customers who have a higher risk of defaulting on their loans. Because of the amount of people defaulting on their loans and not being able to repay the lenders are losing money, so they have to set their interest rates to a figure that allows them to safely cover their costs otherwise their business could be in danger.
Need Money? Let Me Help You
Take advantage from the innovative CreditGraph lending technology today.
No comments:
Post a Comment