While it may seem that people are queueing up down the street to take issue with short term loans, the reality is that the cost of repaying instant cash loans can be much less expensive than relying upon traditional forms of credit.
Repaying cash loans from a payday lender can sometimes cost as much as £30 on every £100 borrowed on a monthly basis. While this would equate to an approximate 2,000 per cent APR, relying on an unauthorised overdraft from a high street lender can often be much more costly, with some banks charging as much as £200 on a £100 overdraft – resulting in an APR of over 800,000 per cent!
Net lending provided by traditional banking institutions is on the decline for a large number of Brits, as loans are now only being approved for consumers with spotless credit ratings, overdrafts are being withdrawn, and the limits on credit cards are being withdrawn. While many economic experts say that this rebalancing is sorely needed, in the event of a financial emergency it can be hard to pass up a 2,000 per cent instant cash loan when the only other option for many consumers is a 800,000 per cent overdraft charge.
Even though short term loans may be more affordable than reliance on an unauthorised overdraft, debt specialists still want to protect borrowers from spiralling debt levels. One such solution could be to limit the number of short term loans a borrower is permitted to take out in an given year, as a Consumer Focus report found in 2010, especially if people only make use of short term loans in emergency situations.
Another way to limit debt levels would be to scale back the overdraft charges issued by banks, experts say. However, traditional high street lenders argue against this, commenting that free banking hinges on these fees and charges.