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.

Related Articles
  1. Economics

    How US Interest Rates Move the World Economy

    Because the US has the world's largest economy, fluctuations in America's interest rates affect much more than domestic growth
  2. Budgeting

    Best 5 Money-Saving Tips to Get out of Debt

    Understand the different types of debt and the reasons why people get into debt. Learn about five tips to follow to get out of debt.
  3. Savings

    The 5 Best Alternatives to Bank Saving Accounts

    Find out about some of the most profitable available alternatives to depositing money in a traditional bank passbook savings account.
  4. Professionals

    Socially Responsible Lending Goes Mainstream

    The solid rates of return that socially responsible lending has posted has caught the attention of institutional investors. Here's a primer.
  5. Retirement

    Eyeing a 401(k) Loan? There Are Better Options

    A 401(k) loan may sound good but it's not worth the risk. Here are other options that allow you to leave your retirement funds untouched.
  6. Professionals

    401(k) Loans: The Good, the Bad and the Ugly

    Borrowing from your 401(k) is ready cash from the best possible lender: you. Here's the upside and downside to using the money before retirement.
  7. Credit & Loans

    Mortgage Broker vs. Direct Lenders: Which is Best?

    There are key differences between mortgage brokers and direct lenders. Here's how to choose which is best for you.
  8. Economics

    What Happens in a Default?

    Borrowers are in default when they don’t honor a debt, whether their failure is intentional or not.
  9. Budgeting

    The 7 Best Ways to Get Out of Debt

    Obtain information on how to put together and execute a plan to get out of debt, including the various steps and methods people use to become debt-free.
  10. Credit & Loans

    Refinance Vs. Debt Restructuring: What's Best For Your Credit Score?

    Discover key differences between refinancing and restructuring debt in regard to terms, the negotiation process and effect on credit scores.
  1. When do I need a letter of credit?

    A letter of credit, sometimes referred to as a documentary credit, acts as a promissory note from a financial institution, ... Read Full Answer >>
  2. Can I take my 401(k) to buy a house?

    Once you reach 59.5, you can use the funds in your 401(k) retirement savings account to buy a house or any other expense ... Read Full Answer >>
  3. Can I use my 401(k) as a collateral for a loan?

    Although federal Internal Revenue Service, or IRS, regulations prohibit using a 401(k) account as collateral for a loan, ... Read Full Answer >>
  4. Why do commercial banks borrow from the Federal Reserve?

    Commercial banks borrow from the Federal Reserve primarily to meet reserve requirements when their cash on hand is low before ... Read Full Answer >>
  5. How does a bank determine what my discretionary income is when making a loan decision?

    Discretionary income is the money left over from your gross income each month after taking out taxes and paying for necessities. ... Read Full Answer >>
  6. What are the typical repayment terms for a syndicated loan?

    The typical repayment terms for a syndicated loan are periods of three to six years for short-term loans or seven to 10 years ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!