Partner Article

UK Payday Lenders Should Implement Better Affordability Checks

What can be more controversial than payday loans? These lenders cater to the needs of most high risk borrowers like Kerry Katona, who has been blasted by some of her peers for showing up in a CashLady advert recently.

“Her promoting this company is disgusting. These companies are not on mums’ sides — they were a factor in me and my four children ending up without a home.” - said Nikki Roberts.

Unfortunately, the present economic slump has left many people and, especially, single parents at the mercy of payday companies. Mainstream banks and building societies won’t give you a loan for the world if you are a former bankrupt or a delinquent nonpayer. And what should be the role of the government in all this mess? Should it regulate lenders: cap their interest rates or outlaw these loans altogether? The answers aren’t at all clear.

What, however, is clear is that people like Nikki Roberts, who once “fell a victim” - using her own words - to payday loan companies by rolling over her old loans multiple times and taking out new ones to cover the costs of the previous, would most likely be better off having their loan applications rejected in the first place. This is what they refer to, as the affordability test. Ms. Roberts should have clearly failed it and been referred to a credit counselor instead. See these tips on how to take your finances back under control.

Like many other Brits experiencing similar financial difficulties, Nikki Roberts turned to payday lenders for the quickest, effortless fix to her urgent cash needs. Obviously, the convenience comes at a price - a steep price that most, who apply for such loans, simply cannot afford. Just like most of us who live on a less than average income, might only occasionally shop at Gucci or Prada, we should only occasionally resort to payday loans - only in emergencies.

Alas, the reality paints the opposite picture - when one is short of cash, they don’t think twice about taking out a payday loan as if it were like withdrawing some money from one’s savings account. It is not like that. The problem is that most people do not understand the nature of the product being short-term emergency cash that must be repaid as fast as possible - in a few days. Instead, they treat these loans like any other loan, “taking their time” to make the payments.

Therefore, educating people about the product and how to manage personal finances, overall may be quite beneficial. I also stand by my opinion about using stricter affordability criteria. Are the former in the interest of payday lenders? Obviously, in order to make money, they actually want to issue as many loans as possible. But at the same time, they should also be concerned about the rate of default that is very high. The debate continues…

This was posted in Bdaily's Members' News section by Andrea Smith .