Is this the beginning of the end for payday loan companies?

As you may have seen in the media this week, Wonga, one of the UK’s leading ‘payday loan’ companies is contemplating shutting its doors and entering Administration.

This follows the closure of several Money Shop outlets across the UK since 2016, but what does this mean for the industry of legitimate loan sharks, and will this finally put a stop to payday loan companies?

To put things into perspective, if you were to borrow £1,000 from a retail bank such as HSBC, Barclays or RBS, over a 12 month period you would likely pay back £1,125, this is with an interest rate of 24.9%. If, however, you took the same loan over the same period with a payday loan company, you would be looking at paying back £1,982, which equates to an interest rate of 150%, some have even higher interest rates.

You may be wondering why then do these companies charge such a high rate of interest if their customers are usually cash-strapped already. This comes down to risk. Someone with a lower credit score is at higher risk of default, meaning they may stop paying. So, to counteract this issue, these companies charge much larger amounts, which hopefully encourages customers to pay their loan
back quicker.

Seems harsh, and sometimes unethical, but despite various documentaries and insider reports from the BBC, Panorama and even governing bodies, this market is still very much legal and open for business. There is the demand for these loans, so somebody must supply.

Despite the economy being on the up, people still need or want to borrow money for holidays, cars or other things, so why then are these companies closing down? This boils down to the market being swamped with  alternatives. For example, if you own a house or a car or a nice watch, you can get a loan against it. If you have generous friends or parents who are willing to act as guarantors, you can get a loan. Even the high street banks have started to relax a bit when it comes to lending money since the 2008 recession.

The concern here however is that there are some people who do not fall into these categories, and if they don’t have their payday loan companies to rely on, where will they get their money from? People may be forced to contact loan sharks who wont just take your car if you don’t pay!

This news then has its pros and cons, as with anything. Yes, it is good that these high interest bandits will no longer be emptying peoples bank accounts, but without this service people may be forced to go to other, more sinister options instead.

To summarise then, the traditional payday loan companies that we all know and some may say hate thanks to their irritatingly catchy jingles may be shutting up shop, but there are plenty of other,
similar businesses still very much alive out there.

Our advice? Shop around. You can now compare loans online to see which will work best for you, and be wary of anybody asking for security such as your car log book or a guarantor, and always read the small print to make sure you’re not paying too much interest.

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