Payday Loan Charges - Why So High?

Payday loans are a short term arrangement between lender and borrower. They are designed to bridge the gap between paychecks when unforeseen circumstances occur. It could be a medical emergency or simply the money needed to pay off the rent. The money is needed right now though, so it can be used as a quick fix. However, depending on the type of arrangement made, fees can range to 45 pounds on a 200 pound note. So why is this process so exorbitant?

Most financial institutions have set rules and regulations regarding borrowing. They also are required by national regulatory services to make these available to the public. Because of the legal terminology contained therein, most ordinary citizens don't have the education required to decipher the language. And lenders can count on this fact to continue this practice.

Consumers used to have to postdate a check in order to receive one of these loans. It was held by the lending firm until restitution was made on the full amount. Nowadays, everything is done online which should make everything easier. This also would include the interest rate and charges that accrue if not payed on time.

Most payday loans lenders are claiming that this type of transaction is a bad risk. They point to the large number of people who don't pay the money back in a timely fashion. There is also the high loss ratio for the people that default on their note. The firm wants to put a safeguard on the cash being lent so as to avoid large monetary losses.

Probably the main reason that these types of loans have big charges is that they are calculated on a yearly rate. The actual transfer of money however, is only provided through a short term contract. This discrepancy is how many of these institutions get away with such large fees. It also explains why many more are starting to enter this type of business and consumers are losing this battle.

Most of these lenders set the APR or annual percentage rate at extraordinary levels (as high as 1100% in some cases), making it hard to pay back. This puts borrowers on a never ending treadmill, forcing them to continually try to pay down the interest while never reaching the principle.