The UK government is to discuss putting a cap on the interest rates of payday loans. While this may seem like welcome news to the consumer, it should be noted that this is bound to do damage to the payday loan market. This means that there will be people who will not be able to get payday loans, which are often needed in emergency situations, and may instead end up having to deal with the consequences of not being able to get money when they need it. This could mean that they lose electricity or water for a month, or if they need car repairs done to get to work, they might end up being made redundant.

It might seem like the government proposal will save people money, but will likely end up cutting life lines instead.

Are Interest Rates for Payday Loans Too High?

First of all it should be noted that the majority of people pay back their payday loans on time. Often they will end up using a payday loan again in the future as well. This alone should be enough to convince anybody that the interest rates are not too high since so many people are ready to use them, but let’s go further and make comparisons with other sorts of loans.

A bank loan has much lower interest rates… except that isn’t really true. Bank loans can offer much lower APR rates, the Annual Percentage Rate. This measures how much interest is being charged on a loan over a period of a year, and bank loans usually take at least that long to pay back, if not a lot longer. With bank loans taking longer than a year to pay back, then the actual amount of interest paid is going to be more than the APR. And if it takes less time to pay off the loan, then of course it will be less than the APR rate which is actually being paid in interest.

Payday loans fall into this latter category of course, with payday loans taking only a few weeks to pay back, far less than a year. It is therefore entirely unfair to judge them on the APR rate for their loans as no one should come anywhere near having to pay that much in interest. In fact, the actual amount that has to be paid in interest with payday loans actually ends up being about the same as with bank loans, or even a bit less. And you are told upfront by Payday Loans UK exactly how much you will be expected to pay back, and when. So compared to normal bank loans, payday loans are not expensive.

What about other forms of quick, short term loans? The only other way to get money quickly is usually with an unauthorised overdraft from your bank. And these often have daily as well as monthly charges and end up being seriously expensive. What about the APRs on these sorts of overdrafts? Well, they really are ridiculous, sometimes in the tens of millions of percent.

“We’re From the Government, and We’re Here to Help”

And yet there is still talk by the government of capping interest rates on payday loans. This will likely mean that some payday loan providers will go out of business, others will probably cut back on their services. The exact consequences can’t be predicted, but it is likely that some of those people who need payday loans the most will have to go without. So yet another reason why one of the most feared phrases in the history of the world is, “We’re from the government, and we’re here to help.”

Tags: APR, bank loans, cap interest rates, government proposal, Payday Loans, Payday Loans UK, short term loans, unauthorised overdrafts

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Ken Heading keeps up to date with all the financial news in the UK, particularly as it affects payday loans, and enjoys writing on this subject.

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