Myths and Truths of Payday Loans

Payday loans critics often spread bad news and myths about payday loans, but the realities of payday lending are vastly different. Here we aim to give you honest and straightforward information to help you to separate the facts from the fiction.

Myth 1

Payday loan interest rates are unreasonably high.

Truth 1

The idea behind Payday loans is that they are borrowed for a very short term. The fee does not compound interest like other financial services. Payday loans are paid back with a one off fee. Payday loans are designed to help customers out of financial difficulties, they are often less expensive than taking on the costs, for example a bouncing cheque, neglecting a bill or missing a credit card payment.

The APR is always disclosed for payday loans, as it is required by law. However due to the short duration of a payday loan the Annual Percentage Rate is rather misleading as payday loans are usually lent over a period of a few weeks, rather than years.

Lets take a look at how APR is calculated. A typical fee would be £25 per £100 borrowed. This equals 25 percent. To reach the triple digits APR that critics quote a customer would have to take out payday loans over and over again. This is unrealistic as most companies do not allow a rollover more than twice.

Myth 2

Payday loan borrowers get trapped into a cycle of debt.

Truth 2

Critics often use the phrase cycle of debt to portray the payday loans industry in a bad light. They quote the APR exaggerations to paint a picture that customers cannot afford to repay their debts.

Payday loan companies work with their customers to find an amount which meets but doesnt exceed their needs. If the customer is not able to make the repayment on time then some companies will offer an extended payment plan at no extra cost.

Payday loans can be a good option for customers facing bounced cheques or missing credit card payments as they are otherwise faced with excessive fees.

Myth 3

Payday loans are lent to people who cannot afford them.

Truth 3

Payday loan critics like to imply that payday loan companies exploit the downtrodden. This is not true and in reality it is mostly the UKs middleclass who take out payday loans.

Many people chose payday loans as they are discreet and dignified. They provide a solution to cash flow problems and save customers the embarrassment from having to borrow money from friends or family.
If for any reason the repayment cannot be made in line with the original contract, and extended payment plan can usually be arranged at no extra charge.

The majority of customers take out payday loans because of their convenience, and the fact they can get quick cash as opposed to having no alternative.