The following is a quote in the Guardian from a man who made the headlines recently for borrowing £250 from a loan shark and ended up paying back more than £90,000 over a 17-year period:
“People usually go to loan sharks because they have a bad credit record: nine times out of ten the high street banks will say no.”
Now, if this is the case, it shows just how misinformed many people are about their borrowing options. Indeed, the man – known as Mike to protect his identity – said that an alternative to loan sharks are Credit Unions, which is true.
However, when it comes to short-term finance, the choice is not just between a loan shark and a Credit Union. Pay day loans are also one of the options on the table and have many advantages over the other choices.
Payday loans have come in for criticism from all quarters in recent years, all while the number of people borrowing from loan sharks has gone largely unnoticed.
If you find yourself in a position where you need to access short-term finance, payday loans are a much better option than borrowing from a loan shark.
Below, we explore why this is the case.
Loan sharks are illegal lenders not bound by any rules except their own.
That means they can charge extortionate rates of interest and deliberately confuse you with regards to how the loan works and how much you will have to pay back.
Many loan sharks are unscrupulous people, with many reports in the media about them turning violent to get what they want.
In short, there are no advantages to borrowing money from a loan shark and you should avoid doing so at all costs.
Pay day loans
There are some who see payday loan companies as akin to loan sharks but these views are completely wide of the mark.
To begin with, they must meet strict criteria set down by the Office of Fair Trading and adhere to codes of ethics. This means their dealings are fully transparent and legitimate.
Also, payday loan providers must spell out in plain English what rate of interest you will have to pay and have processes in place to help you should you fall into difficulty making your repayments. You will not have to worry about intimidation or violence should you be unable to repay the loan.
Payday loans do come with higher rates of interest than traditional bank loans, however, with interest, you need to work out how much you will pay over the period you borrow for as opposed to taking the APR at face value.
The APR is the annual percentage rate and it can be misleading to look at this in isolation. If you took out a payday loan for a period of 12 months, you will find yourself in a serious amount of debt. However, if you are only borrowing for two weeks, an APR of 4,000 per cent is unlikely to bankrupt you.
When taking out such credit, it is important to be sensible. There is a responsibility on you to act responsibly and only borrow what you need when you need it.
Those who get the most out of payday loans use them correctly, which means borrowing small amounts infrequently.