Payday loans are short term unsecured loans promoted to meet the financial needs of a borrower until the next day although are loans given with a much higher interest rate than the alternatives.
Payday loans are often considered “predatory loans”, those types of loans that take advantage of borrowers to lead them deep into debt. Over the past few years payday loans have had a history of controversy and have often been criticised for their lenders exploitation of the poor, being financially draining for low income borrowers. The common issues and where payday loans come in for criticism are as follows:
• Financially Draining for Low Income Communities
Most people who take out payday loans are borrowers from low income communities, and more often than not these people have few assets and are thus unable to obtain secured loans from high street banks with their lower interest rates. This leads to the depletion of low income borrowers’ financial assets via the high interest rates that payday loans charge.
• Lenders Tend to Ignore Legal Restrictions
Lenders of payday loans are notorious for ignoring the legal limits.
• Aggressive Advertising and Collection Practices
The companies that offer payday loans frequently practice aggressive advertising practices. One company in the U.K. advertised themselves via social media networks such as Face-book without showing clearly their annual percentage rates, a legal requirement in the UK is that Annual percentage rates (APRs) must be clearly shown with failure to do so is a breach of the law. In the USA some collection methods implemented by lenders are in law considered illegal.
The New Rules for Lenders
Thankfully, the compounding issues associated with payday loans have caught the attention of financial experts and government regulators. Subsequently four leading trade associations have introduced a Good Practice Customer Charter to guide lenders. Members of the trade associations are expected to meet standards set by the charter and borrowers can make a complaint if the standards are not met.
Under the charter, lenders are required to give clear and complete information on fees, charges, and most importantly how the loan works. Lenders are in addition required to check if the borrower is suitable for the loan and must also take into account the circumstances of the borrower and how much money should be lent.
Borrowers are not to be encouraged by lenders to borrow more than they need, and lenders must ensure that the borrower can afford to repay the loan taking into consideration the other loans and expenses that borrowers may have. Moreover loan extensions can only be given if the borrower asks for them and if the lender reminds the borrower of the risk of taking out a loan extension.
Under the charter, borrowers are entitled to set an agreement on how repayment will be collected and if a repayment card will be used. Borrowers also have the right to cancel this.
If the borrowers are experiencing problems repaying loans then lenders must deal with them sympathetically and must consider new arrangements for repayment, and provide information on where borrowers can get useful advice.
Finally lenders must also provide details on how borrowers can make a complaint.
The four trade associations that established this charter are:
1. The British Cheque and Credit Association
2. The Consumer Credit Trade Association
3. The Consumer Finance Association
4. The Financing and Leasing Association
The full charters guiding lenders on making payday loans can be found on their websites. The charter should be helpful for borrowers who unintentionally get caught up in a cycle of debt. Check www.txtloan.co.uk to know more above loans and cash payments.
This article on payday loans has been contributed by Jamie Williams, an author on business, finance and marketing. Jaime particularly covers topics on loans, including the different types of loans available such as text loans, personal loans, and student loans, etc. alongside their the various issues.