Why Low-Income Citizens Should Avoid Payday Loans
With U.K. payday loan firms looking to advertise on children's television, this article looks at short-term borrowing and why low-income citizens should avoid it.

The growth of payday loan companies has been pronounced in the last few years, as citizens across the globe have sought to negate the impact of economic austerity. While this expansion has courted controversy, it has also been celebrated at various web summits and awards ceremonies across the globe. Take market leader Wonga, for example, which recently won a prize at the highly coveted Europa Awards after being named "best heavyweight startup."

This has caused a great deal of consternation, especially given the revelation that U.K. payday loan operators spent in excess of 500,000 British Pounds advertising through children's television channels during 2012. Promoting the concept of short-term lending and its affiliated interest rates of up to 4.214%, these adverts aired on channels such as Boomerang, the Cartoon Network and Nickelodeon. When you consider this alongside the soaring levels of personal debt in the U.K., it is little wonder that there is a growing desire to restrict payday loan firms and their growing influence as financial lenders.

Destroying the Myth: Why a Payday Loan Is Not a Viable Source of Emergency Credit
The situation in the U.K. reflects a global phenomenon, as the easily accessible nature of payday loans has also been embraced by citizens in the U.S. and other nations. Even as the global economy continues to show signs of prosperity, years of recession, high unemployment and austerity have forced many middle-class and low-income individuals to consider short-term borrowing as a way of maintaining their standard of living. As a result, many people have come to rely on payday loans as a key part of their annual income.

While payday loan companies claim that their financial service is designed to help those facing an unexpected, financial emergency, their advertising appears to aggressively target young and low-income individuals who are struggling to live within their means. The drive to promote their service on children's television is indicative of this ethos, as it allows them to reach single parents or young families who may be struggling to cope against the backdrop of an unstable job market and imposed austerity measures.

Who Uses Payday Loans?
Despite the fact that payday loan companies continue to present an acceptable public facade, their marketing methods reach out to an increasingly vulnerable social demographic. It is estimated that 32% of all British based payday loan recipients use the funds to pay household bills and purchase food, while a further one million applicants take out short-term loans to meet their mortgage or rental demands. These statistics offer genuine insight into why people use payday loans, and suggest that low-income individuals have become overly reliant on short-term borrowing in order to subsist.

Given that costs such as rent, mortgage repayments and food are recurring, it is little wonder that payday loan applicants are being sucked into a vicious cycle of debt. This has been embodied by a rise in the number of people who manage multiple payday loans simultaneously, often relying on alternative lenders to repay an original debt, which isn't the right way to use payday loans. According to debt charity StepChange, more than 2,000 people contacted them to help reduce debt accrued through five or more payday loans during 2012, compared with just 716 who did so throughout the course of 2009.

The Peril of Payday Loans in a Contracting Economy
While payday loan companies will continue to defend the service that they provide and insist that applicants must assume responsibility for the loans that they undertake, this ignores the plight that families face during times of recession. As people become desperate to supplement their existing income and pay household bills, the lure of neatly packaged short-term loans can be too much to resist. There are many reasons to avoid payday loans, but the main problem is that lenders do not represent the true nature of their service, leaving consumers at the mercy of high interest rates, hidden fees and disproportionate penalty charges for late repayments.

There is also the wider issue of regulation, both in terms of lenders themselves and the jurisdiction in which they operate. Firstly, payday loan firms ensure that it is extremely easy to apply for a loan, with a name, address and proof of income often all that is required to guarantee qualification. The majority of firms do not self-regulate, however, which means that returning customers can reapply for funds regardless of whether or not their employment status has changed. There is also an onus on government bodies throughout the world to impose more stringent regulations on short-term lenders, and cap the spiraling cost of credit and its associated interest rates.

The Bottom Line
While individuals must take responsibility for their own approach to borrowing, it cannot be denied that periods of economic hardship can force consumers to pursue inadvisable lines of credit. The fact is that payday loan firms appear to be targeting low-income members of society and coercing them into a perpetual cycle of debt and high interest rates, while also offering a financial product that is extremely unfit for its supposed purpose. With this in mind, it is up to regulatory bodies to curtail these practices and ensure that vulnerable citizens are provided with more reputable financial assistance.

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