The UK Office of Fair Trading’s recent decision not to enforce a more stringent cap upon payday loans should prove to be a boon to both consumers and the short term loans industry. A press release by UK payday loans company Speed-e-Loans CEO Gary Miller-Cheevers welcomes the decision the OFT reached upon completing its “High-Cost Credit Review,” which the office defines as “financial products including home credit, short-term small sum lending such as payday loans, pawnbroking and rent-to-buy retail credit.” However, as both the Office of Fair Trading and most proponents of payday loans point out, “high cost” is a relative term, as credit-constrained consumers who use payday loans often do so to avoid a more expensive alternative like checking account overdraft.
Payday loans: A valid option in the marketplace
While payday loans may not be perfect for all consumers, those who have difficulty obtaining emergency credit via other means found the service most invaluable, said Miller-Cheevers. The OFT’s review unearthed few complaints regarding such short term loans. In fact, the majority of customers surveyed in the High Cost Credit Review found that UK payday loans agencies tended to be sympathetic if they made late payments due to continued financial difficulties. The companies proved willing and able to work with customers to mutual satisfaction.
Miller-Cheevers takes exception to ‘high cost credit’ tag
Beyond the relative definitions of “cheap” versus “expensive,” Miller-Cheevers pointed to the advantage payday loans have over bank overdraft protection: payday loans are cheaper. “Our typical APR is 2,334 percent,” he said (Editor’s Note: In the U.S., payday loans are typically offered at much lower APRs). “This sounds horrendous. However, you have to bear in mind that this is the annual rate someone is charged, and payday loans are not designed for long term borrowing. It’s a bit like buying sausages in a supermarket and the price being shown per ton!”
The APR mismatch
Miller-Cheevers’ Speed-e-Loans company charges about 1 percent per day plus a fee of £4.95 for 20-day payday loans. For the purposes of U.S. conversion, one British pound sterling is approximately $1.48. Thus, a £100 payday loan taken for 20 days would cost about £25.94. Similar to the rules U.S. payday loans companies must follow as prescribed by the Truth in Lending Act, UK payday loans outlets must publicize the APR, which in this example would be 2,686. Again, remember, the relative cost here should be compared with an equivalent alternative, such as overdraft protection.
How do Speed-e-Loans payday loans compare with overdraft?
Four High Street banks and their overall charges for a £100 over the same period of time are compared on the Speed-e-Loans website. Bank rate samples were taken in November 2009. At Alliance Leicester, a £100 checking overdraft would accrue a £100 charge (that’s £5 per day over 20 days). Thus, a £200 total charge would be the final result. At Halifax bank, the cost is the same. NatWest would charge £210 total (up to £90 for returned items, £20 per month overdraft fee). Lloyds TSB charges £300 (£20/day for 10 days; 20 days would of course be worse).
Then there are Speed-e-Loans payday loans. For a £100 payday loan, the total amount a consumer would pay back in 20 days is £125.94. The UK Office of Fair Trading can see that this option can easily be less expensive for consumers. In America, the same holds true for payday loans.
Payday loans: Avoid overdraft, even when abroad: