Payday loans provide the quick access to cash that you need, whether you’ve got unexpected payments or you simply need to access more money than you currently have. This kind of credit agreement gives you quick access to a smaller amount of cash than a traditional kind of loan, and with it comes a significantly higher interest rate.
The UK government is currently facing new pressure to introduce a new cap on these interest rates, however, in an attempt to ‘protect’ consumer interests – particularly those from a poorer background. David Miliband and other prominent Labour figures have been pushing for more supports and signing up in support of a new motion that protects poorer consumers.
So why is the interest rate so high on this particular kind of credit agreement? Obviously, with interest rates that enter their thousands it seems immediately worrying that this kind of repayment agreement can exist – but in order to understand how fair these deals really are, you must look at the bigger picture. A bigger interest rate doesn’t necessarily mean a huge amount to repay.
The nature of a payday loan is that it is only a relatively small amount of money compared to other traditional forms of credit. Unlike a mortgage or a car loan, the amount you will borrow will generally be under £1,000. Hence, a higher interest rate means that the amount you pay back is proportionate of the smaller amount you paid, and hence completely reasonable. But why are backbenchers supporting a motion to help put a cap on these payday loan interest rates?
It seems relatively simple. With over 1.2 million British people every year being tied up in a payday loan agreement, and an ever-increasing popularity for this kind of credit, people need to be protected from the potential of interest rates skyrocketing. As soon as British people begin to rely on this kind of credit, and ditching many forms of traditional credit, they could potentially become vulnerable to companies that operate for illegitimate and malicious purposes.
Due to the online nature of these loans there will always be malicious activity, and with the possibility of some payday loan lenders operating extremely high interest rates, the consumers will always be at risk. It seems that the only way to protect consumers from this would be to introduce a cap on payday loans.