The press has often noted the perceived similarities between payday lenders and loan sharks. They do this because a loan shark will charge very high interest rates, the loan will be unsecured, and they will expect the money back quickly. This does actually sound quite a lot like a payday loan, however there is a question about whether the rates are actually high or not with pay day loans.

Are Payday Interest Rates High?

If you've ever seen a television advert for a pay day loan, then you will have found it hard to miss the APR for the loan. There is a legal requirement that lenders show that rate, and make it a certain size so that it cannot be hidden. That's not too bad an idea, as it should be a good warning for people not to treat it like a long term loan.

There are no payday lenders who are going to try to get you take out a loan for a year. Instead, you are asked to pay the loan back as soon as you possibly can, when you're next paid. And these loans are only available to people with a monthly salary, so it should be no more than a month that you have them for.

The only time that the interest rates really do get quite high is when the borrower does not repay the loan when they are supposed to. Now, that is not always the fault of the borrower, things happen after all, but it does cost the payday lender money. They lose out in terms of opportunity costs, they cannot loan that money to someone else if they don't have it back.

Of course everyone would expect for there to be some extra charge if you don't repay a loan when you're supposed to, but what people complain about is that the charges rise too quickly. But what has to be kept in mind is that this is a short term loan, so everything is happening more quickly. When you take 2 months to pay back a 1 month loan, that's twice as long as you should be taking. It's the equivalent of taking 10 years to repay a loan that you took out for 5 years.

What Would Happen If There Were No Payday Loans?

So with interest rates not really being as high as people think they are, and with the charges not being so unfair either, what other claims are levelled against payday lenders? One of the main ones is that they lend almost exclusively to the poor. This begs the question though, who else would need a short term loan of this sort?

Do people expect that rich people are going to be taking out month long loans? Do they have trouble paying their bills, do they have to worry about the cost of car repairs when their car breaks down? Do they ever get stuck abroad with no money? Of course it is poor people who use them, they do so because they are the only ones who will need them.

So if the sections of the press and the government actually got their way, and they made payday loans illegal, what would the poor people who run out of money before the end of the month do? Some would probably sit in their cold house with no electricity until they're next paid and could afford to have it switched on again. Others, however, would decide to use the services of a real loan shark.

For all of the perceived faults of payday lenders, none have been accused of threatening physical violence against anyone for not paying. Also, their rates are consistent and they don't change the rules half way through. In other words, they are a far better bet than loan sharks.

Emergency Loans

To abolish pay day loans because the people who need them are in a desperate situation would be like abolishing hospitals because people get sick. It is not the fault of the lenders that these people need money, but nor is it their responsibility to simply give them money for free. Actually then, pay day lenders provide an essential service, and it is the poorest people who would feel the loss if they were abolished.

To learn more concering the actual rates of interest for payday loans visit http://www.payday-loans.org.uk where Juan Dacey also writes.