That, in a nutshell, explains the massive rise in popularity of pay day loans. They have risen to prominence in response to the global financial downturn and in particular the effect it has had on the willingness to lend of  mainstream financial institutions such as banks and building societies.

So if they are responding to, and fulfilling, a genuine need, why are they subject to such intense scrutiny and to widespread criticism? Let’s face it, the payday loan industry is under attack from many quarters, from newspapers and MPs to the Office of Fair Trading. Against that, many people who have actually taken advantage of payday loans have reported a positive experience. So where does the truth lie?

Payday loans are certainly not suitable for everyone – they are designed to be used to deal with an emergency and or short term use only. Where problems arise is when the borrower is unable to repay on time and has to defer repayment – known as rolling over the loan. Given the very high interest rates that apply to loans from payday loan lenders, rolling over your loan for several months can get very expensive and there is certainly evidence that this is causing financial hardship for many. On the other hand used as intended payday loans can be extremely helpful for budgeting. Recent research has in fact indicated that it is less expensive to take out a cash advance for a short period from a payday lender than certain types of borrowing from a mainstream lender.

The research was carried out by CISI  who examined the expenses involved in taking out a loan of £200 for a period of ten days via a payday loan company, compared with borrowing the same amount from two main banks by way of unauthorised overdraft.

For those borrowing from a payday lender, the total costs amounted to approximately £66 – equivalent to an an annual percentage of over 7000%. That’s certainly quite expensive, but when you compare it with the banks it turned out their charge for credit varied from £80-110, working out to an APR of over 53000%!

So, when compared with racking up charges on an unauthorised overdraft at least, it would appear that payday loans make good sense. And this is the point. It is better to take out a payday loan for a short period rather than be hit with overdraft or excess credit card charges – just be sure you can pay the loan back at the end of the contract term, because rolling it over for a longer period changes things dramatically.