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Are Payday Loan Providers Loan Sharks?
It seems that I have been seeing these two terms side by side a lot these days. There are many articles and commentaries on the web purporting that payday loan providers are nothing more than loan sharks in disguise. What is a loan shark anyway? According to Merriam Webster, a loan shark is one who lends money to individuals at exorbitant rates of interest.

What is a payday loan provider? It is a financial institution that offers short term loans (obviously called payday loans) to anyone who is in need of them. Do they lend money to individuals at exorbitant rates of interest? It depends on how you wish to look at things.

For example, certain sectors which are trying to bring down the payday loan industry will not hesitate to say yes and provide figures such as 1000% interest and the like. Yet what they do not understand – or maybe do not want to understand – is that payday loan providers do not charge interest in the way conventional loan providers do. As such, it is really not fair nor is it logical to compare different conventional loans to payday loans in terms of “interest.” They are not the same banana.

If you ever have taken out a payday loan, you would know how the charges are applied. For payday loans, instead of computing the interest or APR or whatever term you want to use, a fixed fee is charged for every certain amount borrowed instead. So for example, an individual borrows £500. If the payday loan lender charges £20 for every £100 borrowed, the borrower would end up paying back a total amount of £600. Unlike with interest rates, which we all know fluctuate, the amount that a borrower has to pay back in regard to his payday loan does not change. It is a fixed amount, period. More so, APRs do not always really reflect the real cost of a loan. According to Annette Stewart of Provident Financial:

APR doesn’t properly reflect the true cost of short-term loans. Also, this is a fixed, all-in charge. It doesn’t change if a customer stops payments for a while or reduces them.

What she did not mention is the other important fact when it comes to payday loans – the ease and convenience of it all. We all know how complicated it can be to acquire a traditional loan. Mainstream banks and financial institutions have this long and arduous process when it comes to lending money. It can take weeks – even months – just to get a simple loan. Payday loan providers, however, make it easier and more convenient for those borrowers who need the cash as soon as possible. Naturally, this kind of service warrants a certain price as well. After all, you are paying for more than the loan amount but also for the perks.

So are payday loan providers loan sharks? I don’t think so. They are merely businesspeople who have found their niche. They are supplying a solution to an expressed need.

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