I lived in the "poorest postal code in Canada" and it was full of guys who traded food to each other like they were still in prison. If you didn't pay the huge interest payments you found yourself assaulted, unable to work, and deeper in the hole
If you find yourself with a week until payday and £0 in the bank it may be difficult not to consider the option.
I think instant pay day loan companies like Wonga have done a lot for the cash flow problem. Personally, I've never used them, but if you have a bill and need to avoid a £50 late penalty, you can get a $100 loan at 1% interest a day, which is a brilliant value proposition if payday is a week away. I've seen a lot of criticism of these companies, but I think it's from people who don't understand the problem.
They also hit bank accounts with EFT withdrawal up to 3x per day if the first one didn't clear, which is $40 NSF charge each time. Unfortunately because these lenders signed a piece of paper allowing for automatic withdrawal, the payday loan company then steals all your money the day before you are paid, so your account will be debited -$200 for a $100 loan you missed a payment for, factoring in all the NSF and late charges. Since most people are paid with direct deposit nothing they could do to stop this. Bank will also charge interest on the overdraft.
So on payday you have nothing, and are forced to go back to the payday loan company just to survive but are now paying even higher interest, because you defaulted once. Sounds like they are well regulated where you live but not here they are still loan sharks.
Things were very bad in the UK until recently, and in many ways still are, but the companies have come under a lot of regulatory pressure, and are being... better. I'm afraid that sometimes you have to choose between 2 evils.
People are not dumb, and 1.2 million (3/100th the population) took a payday loan in 2009. You could credit a lower number to individual poor judgment, but these are rational economic operators borrowing small amounts at high interest rates to avoid hunger or larger losses due to cash flow problems.
Of course that sounds worse than it is because the loan is short term.
Still though, I wish there was a more reasonable solution to this problem. I wonder how much of these rates are due to the risk involved in loaning to the sort of people who take these loans and how much of it is "because they can".
My bet is that most of the people that use these services couldn't make a simple interest calculation
I expect that if you don't repay when you agreed, though, you're going to end up paying a lot more.
It seems that the most common of these unexpected expenses include automobile related repair expenses (which come once every few years that even the best of us tend to forget to budget) and health expenses. Are there any others that come to mind?
Of course, automobile and health costs are the ones that are typically mitigated by insurance to some degree. Oh and what do the poor in countries like the United States rarely have? Insurance.... :(
So the problem is often not "I have £50 to plan food for the rest of the month" but "I have an unexpected expense and now I have £2 I found behind the sofa and a bare cupboard/fridge to feed myself until I get some more money".
I also found that when I am poor I am much more reluctant to go out and buy in bulk. Even though it would at least give me food enough to last, there's something scary about blowing your entire budget in one go.
If you are poor it is also harder to get to places that sell things cheaply in bulk (because perhaps you don't have a car) and you are more likely to get things from a corner store as needed where there is a higher markup on prices.