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.

Finacial products from our partners
Property search
Latest stories from i100
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

    SThree: HR Benefits Manager

    £40000 - £50000 per annum + pro rata: SThree: SThree Group have been well esta...

    Recruitment Genius: Office Manager / Financial Services

    £30000 - £37000 per annum: Recruitment Genius: Established in 1999, a highly r...

    Jemma Gent: Year End Accountant

    £250-£300 Day Rate: Jemma Gent: Are you a qualified accountant with strong exp...

    Jemma Gent: Management Accountant

    £230 - £260 Day Rate: Jemma Gent: Do you want to stamp your footprint in histo...

    Day In a Page

    War with Isis: Fears that the looming battle for Mosul will unleash 'a million refugees'

    The battle for Mosul will unleash 'a million refugees'

    Aid agencies prepare for vast exodus following planned Iraqi offensive against the Isis-held city, reports Patrick Cockburn
    Yvette Cooper: We can't lose the election. There's too much on the line

    Yvette Cooper: We can't lose the election. There's too much on the line

    The shadow Home Secretary on fighting radical Islam, protecting children, and why anyone in Labour who's thinking beyond May must 'sort themselves out'
    A bad week for the Greens: Leader Natalie Bennett's 'car crash' radio interview is followed by Brighton council's failure to set a budget due to infighting

    It's not easy being Green

    After a bad week in which its leader had a public meltdown and its only city council couldn't agree on a budget vote, what next for the alternative party? It's over to Caroline Lucas to find out
    Gorillas nearly missed: BBC producers didn't want to broadcast Sir David Attenborough's famed Rwandan encounter

    Gorillas nearly missed

    BBC producers didn't want to broadcast Sir David Attenborough's famed Rwandan encounter
    Downton Abbey effect sees impoverished Italian nobles inspired to open their doors to paying guests for up to €650 a night

    The Downton Abbey effect

    Impoverished Italian nobles are opening their doors to paying guests, inspired by the TV drama
    China's wild panda numbers have increased by 17% since 2003, new census reveals

    China's wild panda numbers on the up

    New census reveals 17% since 2003
    Barbara Woodward: Britain's first female ambassador to China intends to forge strong links with the growing economic superpower

    Our woman in Beijing builds a new relationship

    Britain's first female ambassador to China intends to forge strong links with growing economic power
    Courage is rare. True humility is even rarer. But the only British soldier to be awarded the Victoria Cross in Afghanistan has both

    Courage is rare. True humility is even rarer

    Beware of imitations, but the words of the soldier awarded the Victoria Cross were the real thing, says DJ Taylor
    Alexander McQueen: The catwalk was a stage for the designer's astonishing and troubling vision

    Alexander McQueen's astonishing vision

    Ahead of a major retrospective, Alexander Fury talks to the collaborators who helped create the late designer's notorious spectacle
    New BBC series savours half a century of food in Britain, from Vesta curries to nouvelle cuisine

    Dinner through the decades

    A new BBC series challenged Brandon Robshaw and his family to eat their way from the 1950s to the 1990s
    Philippa Perry interview: The psychotherapist on McDonald's, fancy specs and meeting Grayson Perry on an evening course

    Philippa Perry interview

    The psychotherapist on McDonald's, fancy specs and meeting Grayson Perry on an evening course
    Bill Granger recipes: Our chef recreates the exoticism of the Indonesian stir-fry

    Bill Granger's Indonesian stir-fry recipes

    Our chef was inspired by the south-east Asian cuisine he encountered as a teenager
    Chelsea vs Tottenham: Harry Kane was at Wembley to see Spurs beat the Blues and win the Capital One Cup - now he's their great hope

    Harry Kane interview

    The striker was at Wembley to see Spurs beat the Blues and win the Capital One Cup - now he's their great hope
    The Last Word: For the good of the game: why on earth don’t we leave Fifa?

    Michael Calvin's Last Word

    For the good of the game: why on earth don’t we leave Fifa?
    HIV pill: Scientists hail discovery of 'game-changer' that cuts the risk of infection among gay men by 86%

    Scientists hail daily pill that protects against HIV infection

    Breakthrough in battle against global scourge – but will the NHS pay for it?