Is one-year borrowing worse than a payday loan?

You don't have to pay 5,853 per cent interest to get cash... Chiara Cavaglieri checks other options

It would appear that warnings against the toxic nature of payday loans have had little success, after Wonga's recent announcement that it made pre-tax profits of £84.5m, up 35 per cent. Even if the message is slowly getting through, borrowers now need to watch out for another breed of companies offering short-term loans – the 12-month lenders.

One-year loans have managed to escape some of the wrath aimed at payday lenders, but they are potentially more dangerous because the headline interest rate is lower. The likes of Wonga have absurd annual percentage rates (APRs) of 5,853 per cent while many companies offering 12-month loans charge 299 per cent. The truth is that the APR on a 30-day loan is somewhat misleading because they are – theoretically at least – designed for very short-term borrowing, but over a whole year you'll be paying interest for much longer and that's when an extortionate rate is a worry.

They may insist otherwise, but the target audience for both payday and one-year loan companies is the vulnerable – the television adverts and marketing material tempt borrowers by offering hundreds of pounds in their accounts in a matter of minutes. Many say that they accept people with bad credit histories, raising concerns that short-term lenders fail to check whether borrowers can really afford to repay the loans in time. Regulators have also criticised firms encouraging customers to roll over loans, which can lead to the total debt spiralling out of control.

"One-year loans should be treated with caution as they can be an extremely expensive way to borrow. People should consider all their options, or seek free independent debt advice if they are struggling with their finances. The high-cost credit market is dogged by poor practice," says Which? executive director Richard Lloyd.

On the Pounds to Pocket website the blurb boasts that "there are no hidden fees" and "you can even repay your loan early with no pre-payment penalties". While this may be a relief to someone with fairly low expectations of being treated fairly, there are some other areas of real concern. The inflated interest rate, for starters – they cite an example loan of £1,000 over 365 days with 12 payments of £158.19, equivalent to 278 per cent APR. Other companies charge even more, with Ladder Loans asking for £163.10 per month on a £1,000 loan, working out to 299 per cent APR.

To get an idea of just how expensive these loans are, Marks & Spencer offers a one-year loan at 19.9 per cent APR costing £91.82 per month. The total amount repayable with M&S would be £1,102 at the end of the year, a staggering difference of over £850 compared to the Ladder Loans loan (£1,958). On top of this you could be stung with late payment penalty fees (both Pounds to Pocket and Quick Quid hit you with an automatic charge of £12) and if you miss several payments in a row many of these firms play hard ball and demand the full balance and any unpaid interest.

There may be long-term damaging effects too as payday loans can make it more difficult to get a loan, mortgage, overdraft and even credit card if lenders differentiate between payday loans and high street loans when looking at your credit report.

"Lenders' scoring systems are built by modelling actual customer data. As a result, if a particular lender's experience is that customers who take out payday loans are more likely to miss their repayments, this will be reflected in their credit scoring," says James Jones of credit reference agency Experian.

The good news is that there are many alternatives to short-term loans. If you use an existing credit card and clear the whole card in full the following month you don't pay any interest at all. If you have a poor credit history you may be able to apply for a card offering a 0 per cent introductory deal. The market-leading cards are reserved for people with the best records but you are far more likely to be accepted for shorter deals such as the Barclaycard Initial, which gives 0 per cent on spending for five months. You must pay at least the monthly minimum or you lose the interest-free bonus and if you don't clear the card before the end of this period the interest payable is a hefty 34.9 per cent representative APR (although this is still cheaper than short-term and payday loans).

Before you apply for additional loans or credit cards do check your credit record. There are lots of ways to improve your score including getting rid of old credit cards you no longer use, registering to vote at your current address, and reviewing your report to check everything is accurate (you can also add a notice of correction to explain any missed payments).

Credit unions are another option. Members are offered cheap loans with no set-up fees or early redemption charges and the maximum a credit union can legally charge is 26.8 per cent APR. Many charge no more than 1 per cent a month on the reducing balance of the loan (an APR of 12.7 per cent), equivalent to paying back a maximum £1,067 in total if you borrowed £1,000 over a year. These are independently-run co-operative organisations which provide loans, savings and occasionally current accounts.

"Many credit unions help members to escape from the high-cost trap of payday lending," says Mark Lyonette from the Association of British Credit Unions.

An authorised overdraft can also be a useful way to borrow small sums. Most banks offer arranged overdraft limits charging an average interest rate of 16 per cent according to, and some offer interest-free overdrafts for a certain period. But you should steer well clear of unauthorised overdrafts as these have monthly fees from £5 to £35 or more as well as transaction fees for every cash withdrawal, direct debit, standing order, cheque and card payment.

Ian Thorpe had Rio 2016 in his sights
Thiago Silva pulls Arjen Robben back to concede a penalty
world cup 2014Brazil 0 Netherlands 3: More misery for hosts as Dutch take third place
Tommy Ramone performing at The Old Waldorf Nightclub in 1978 in San Francisco, California.
peopleDrummer Tommy was last surviving member of seminal band
Life and Style
Swimsuit, £245, by Agent Provocateur

Diving in at the deep end is no excuse for shirking the style stakes

Life and Style
Several male celebrities have confessed to being on a diet, including, from left to right, Hugh Grant, Benedict Cumberbatch and Ryan Reynolds
life...and the weight loss industry is rubbing its hands in glee
Spectators photograph the Tour de France riders as they make their way through the Yorkshire countryside
voicesHoward Jacobson: Line the streets for a cycling race? You might just as well watch a swarm of wasps
Life and Style
lifeHere's one answer to an inquisitive Reddit user's question
Arts and Entertainment
'Eminem's recovery from substance abuse has made him a more potent performer, with physical charisma and energy he never had before'
arts + entsReview: Wembley Stadium ***
Joe Root and James Anderson celebrate their record-beaking partnership
cricketEngland's last-wicket stand against India rewrites the history books
peopleDave Legeno, the actor who played werewolf Fenrir Greyback in the Harry Potter films, has died
Finacial products from our partners
Property search
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Information Security Manager (ISO 27001, Accreditation, ITIL)

    £70000 per annum: Harrington Starr: Information Security Manager (ISO 27001, A...

    Biztalk - outstanding opportunity

    £75000 - £85000 per annum + ex bens: Deerfoot IT Resources Limited: Biztalk Te...

    Trade Desk Specialist (FIX, Linux, Windows, Network Security)

    £60000 per annum: Harrington Starr: Trade Desk Specialist (FIX, Linux, Windows...

    Service Desk Analyst (Windows, Active Directory, ITIL, Reuter)

    £35000 per annum: Harrington Starr: Service Desk Analyst (Windows, Active Dire...

    Day In a Page

    A History of the First World War in 100 Moments: Peace without magnanimity - the summit in a railway siding that ended the fighting

    A History of the First World War in 100 Moments

    Peace without magnanimity - the summit in a railway siding that ended the fighting
    Scottish independence: How the Commonwealth Games could swing the vote

    Scottish independence: How the Commonwealth Games could swing the vote

    In the final part of our series, Chris Green arrives in Glasgow - a host city struggling to keep the politics out of its celebration of sport
    Out in the cold: A writer spends a night on the streets and hears the stories of the homeless

    A writer spends a night on the streets

    Rough sleepers - the homeless, the destitute and the drunk - exist in every city. Will Nicoll meets those whose luck has run out
    Striking new stations, high-speed links and (whisper it) better services - the UK's railways are entering a new golden age

    UK's railways are entering a new golden age

    New stations are opening across the country and our railways appear to be entering an era not seen in Britain since the early 1950s
    Conchita Wurst becomes a 'bride' on the Paris catwalk - and proves there is life after Eurovision

    Conchita becomes a 'bride' on Paris catwalk

    Alexander Fury salutes the Eurovision Song Contest winner's latest triumph
    Pétanque World Championship in Marseilles hit by

    Pétanque 'world cup' hit by death threats

    This year's most acrimonious sporting event took place in France, not Brazil. How did pétanque get so passionate?
    Whelks are healthy, versatile and sustainable - so why did we stop eating them in the UK?

    Why did we stop eating whelks?

    Whelks were the Victorian equivalent of the donor kebab and our stocks are abundant. So why do we now export them all to the Far East?
    10 best women's sunglasses

    In the shade: 10 best women's sunglasses

    From luxury bespoke eyewear to fun festival sunnies, we round up the shades to be seen in this summer
    Germany vs Argentina World Cup 2014: Lionel Messi? Javier Mascherano is key for Argentina...

    World Cup final: Messi? Mascherano is key for Argentina...

    No 10 is always centre of attention but Barça team-mate is just as crucial to finalists’ hopes
    Siobhan-Marie O’Connor: Swimmer knows she needs Glasgow joy on road to Rio

    Siobhan-Marie O’Connor: Swimmer needs Glasgow joy on road to Rio

    18-year-old says this month’s Commonwealth Games are a key staging post in her career before time slips away
    The true Gaza back-story that the Israelis aren’t telling this week

    The true Gaza back-story that the Israelis aren’t telling this week

    A future Palestine state will have no borders and be an enclave within Israel, surrounded on all sides by Israeli-held territory, says Robert Fisk
    A History of the First World War in 100 Moments: The German people demand an end to the fighting

    A History of the First World War in 100 Moments

    The German people demand an end to the fighting
    New play by Oscar Wilde's grandson reveals what the Irish wit said at his trials

    New play reveals what Oscar Wilde said at trials

    For a century, what Wilde actually said at his trials was a mystery. But the recent discovery of shorthand notes changed that. Now his grandson Merlin Holland has turned them into a play
    Can scientists save the world's sea life from

    Can scientists save our sea life?

    By the end of the century, the only living things left in our oceans could be plankton and jellyfish. Alex Renton meets the scientists who are trying to turn the tide
    Richard III, Trafalgar Studios, review: Martin Freeman gives highly intelligent performance

    Richard III review

    Martin Freeman’s psychotic monarch is big on mockery but wanting in malice