Quick-fix loans are tempting, but beware...

Just £100 can turn into a monster debt if you don't pay it back on time. Chiara Cavaglieri reports on the alternatives to bank overdrafts

Short-term loan firms will be expecting a bumper month as the post-Christmas debt blues take their toll. Lenders such as TxtLoan.co.uk and Cashgenieloans.co.uk offer Britain's cash-strapped access to instant cash, usually with loans lasting no longer than 30 days. The theory behind these companies is that people can borrow money for emergencies and unforeseen bills, which covers them until their next pay day.

The TxtLoan service is a modern twist on the standard "pay-day loan" format. Upon registering, customers are given a bespoke PIN, which they can then use to send a loan request via text message and access £100 within a matter of minutes. The appeal is understandable and even preferable to using a current account overdraft. With TxtLoan you can get your hands on £100 with a loan term as short as seven days, and, once the week is up, you repay just £110.

"Paying £10 on a £100 seven-day loan is better than your current account going into unauthorised overdraft and you getting charged £30 or more by your bank. It's also better than not being able to pay your gas or electricity bill, damaging your credit rating and and risk being cut off," says Andrew Hagger, from Moneynet.co.uk.

However, relying on this type of service on a regular basis can be a very dangerous way of borrowing. Repaying £110 on a £100 loan may sound harmless enough but it actually equates to an interest rate of 994 per cent APR. You are also charged a £1 handling fee for each text sent as well as a one-off £1 fee for the initial registration. More importantly, if you fail to pay back the loan within seven days, the costs can spiral in a matter of days.

If TxtLoan cannot collect its money on day eight, on day nine and day 11 you'll be sent an overdue reminder text and charged a £25 administrative and transaction fee. If the loan (which now stands at £200) still hasn't been repaid, you'll be hit with another fee of £20 on days 16 and 23. Finally, if the loan is not paid back in full on day 46, it is referred to a debt-collection agency and you will incur an additional £46 charge. Throughout this process, TxtLoan tries to access the money from your bank account every day. In theory, this is to ensure that you pay the least amount possible in fees, but could be a disaster if your bank is charging you every time a transaction is bounced.

Despite the potential for debt, TxtLoan says it is responsible about how it lends and ensures that all customers know its service is designed for short-term borrowing only, and, as a result, over 95 per cent pay back the £100 on time. "We don't support frivolous spending. We're lending small sums of money, designed for people who have a short-term cash crunch and to help them more efficiently manage their personal finances," says Olly Scott, spokesman for TxtLoan.

To be accepted, TxtLoan customers are credit checked when they register and must be receiving a regular income into a UK bank account, complete with an active debit card. Students and anyone who has been declared bankrupt or who has been the subject of debt collection within the past 18 months will also be turned down. In fact, TxtLoan says that around 85 per cent of applicants are rejected.

In comparison, Cash Genie offers a more typical "pay-day loan" service. Unlike TxtLoan, it does not undertake a full credit check, and customers can borrow more cash for a longer period (between £75 and £750, for a maximum of 31 days). Also, at a charge of 30 pence for every 100 pence borrowed, using Cash Genie will cost more than the 25 per cent average that other pay-day loan providers levy. So, if you borrowed £100, you would have to repay £130, and an extra fee of up to £20 applies if you want the money the same day.

Defaulting will again see the debt rise sharply from one day to the next. On day one there is a late fee of £15 and on day three, Cash Genie sends a default reminder by letter and charges £12 for the pleasure. Compound interest will also kick in at 30 per cent, although Cash Genie says that all three of these charges can be wiped off if customers get in touch promptly. After 10 days another letter is sent, costing £12, and finally the matter is transferred to a recovery firm on day 15, incurring an automatic £50 fee.

If your credit rating is OK, it's far cheaper to borrow on an agreed overdraft from your bank, although not on an unauthorised overdraft. The Alliance & Leicester Premier Account offers a 12-month overdraft at 0 per cent interest as long as you pay in £500 per month, although watch out if you breach the authorised overdraft limits and face penalty fees of £5 per day, up to a maximum of £100. Some bank accounts also have a buffer zone, allowing you to go overdrawn by a small amount without paying any interest; NatWest, for example, has a £15 buffer, whilst HSBC's buffer is £10.

Alternatively, look for a low-rate credit card such as the Barclaycard Simplicity Visa, which charges just 6.8 per cent, or take advantage of cards with introductory bonuses. The best buy for new spending is the Tesco Clubcard Credit Card, which gives 12 months interest free, followed by 16.9 per cent APR. Otherwise, there are credit cards aimed specifically at those with tarnished credit records.

"As credit blemishes increase, access to the best deals reduces but there are a few credit cards that are designed for the 'underserved' or those in need of credit repair," says David Black, a banking expert at analysts Defaqto.

For anyone struggling because they haven't yet built up a credit rating, the Barclaycard Initial charges 27.9 per cent APR. The Capital One Classic card charges 34.9 per cent and is open to people with County Court Judgments, and for sub-prime borrowers, the Aqua Mastercard charges from up to 39.9 per cent, and the Vanquis Bank Visa charges up to 59.9 per cent.