Payday loans are a form of short term borrowing. There are a numbe of reasons for, or consequences of this, depending on how you look at it. If you take the position that they are designed to be short term loans, then there are factors that can be seen as consequences. If on the other hand, you were to design a form of lending and then decide on its best use, then they are reasons that they should only be used for in short term.

Putting a spotlight on APR

In short, these reasons or consequences are: high rates of APR, no credit checks or faxing of documents required, and quick decisions being made. Of course, what makes them a short term loan is that they have to be paid back the following month, but this in neither a reason or a consequence, it is merely a description.

To take the factor which makes payday loans necessarily short term loans, the high annual percentage rates, we can see that this can be seen as either a consequence or a reason for payday loans only being appropriate for the short term. Quite simply, if you remove all the labels from loans, and saw a payday loan only in terms of its APR then it becomes obvious that it should only be taken out over the short term. If it were to be taken out over a year, then the interest would be massive. Of course for the lendee, lower interest rates are better however long the loan is going to be taken out for. However, it has to be worth the while of the lender as well. From that point of view, higher interest rates are better for the lender, however long it is going to be taken out for. Taking these together though, a middle ground can be found.

So from looking at the APR rate, it is immediately unnatractive to the person who wants a loan, and conversely is very attractive to those giving the loan. So the lender has to get people to take out the loan, and the way that is done is by saying that it should only be taken out over a short period of time, and therefore little interest will have to be paid. That is in fact just as fair as a bank offering a long term loan, which they do because interest rates are quite low, meaning that it has to accumulate over a longer period of time. The actual amount of interest paid therefore levels out, often with less interest being paid on the short term loan, despite the high APR.

Seen in this way therefore, APR can be described as a reason that payday loans a short term loan. On the other hand, someone designing a payday loan would also have to do this to avoid attracting people that wanted long term loans. The APR rates therefore make sure that payday loans are not taken out when people have the intention of paying it back a long way in the future. In this sense, it can be seen as a consequence, or necessary part, of designing a short term loan.

The other factors will be considered in the following blog post.

Tags: APR, bank loans, lendee, lender, Payday Loans, Payday Loans UK, short term borrowing, short term loan

Written by tZiegler

Tony Spiel has years of experience in financial matters, especially in the payday loan market. In his off time he is a keen scuba diver.

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