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.

Voices
Homeless Veterans charity auction: Cook with Angela Hartnett and Neil Borthwick at Merchants Tavern
charity appealTime is running out to secure your favourite lot as our auction closes at 2pm tomorrow
Arts and Entertainment
J Jefferson Farjeon at home in 1953
booksBooksellers say readers are turning away from modern thrillers and back to golden age of crime writing
Sport
Amir Khan is engaged in a broader battle than attempting to win a fight with Floyd Mayweather
boxing Exclusive: Amir Khan reveals plans to travel to Pakistan
News
Stacey Dooley was the only woman to be nominated in last month’s Grierson awards
mediaClare Balding and Davina McCall among those overlooked for Grierson awards
PROMOTED VIDEO
Voices
Joseph Kynaston Reeves arguing with Russell Brand outside the RBS’s London offices on Friday
voicesDJ Taylor: The great tradition of St Paul and Zola reached its nadir with a worker's rant to Russell Brand
News
Twitchers see things differently, depending on their gender
scienceNew study shows that birdwatching men have a lot in common with their feathered friends...
News
i100
Arts and Entertainment
Caroline Flack became the tenth winner of Strictly Come Dancing
tvReview: 'Absolutely phenomenal' Xtra Factor presenter wins Strictly Come Dancing final
Life and Style
A still from the 1939 film version of Margaret Mitchell's 'Gone with the Wind'
life
News
Xander van der Burgt, at the Royal Botanic Gardens, Kew
scienceA Kew Gardens botanist has found 25 new large tree species - and he's sure there are more out there
Arts and Entertainment
British actor Idris Elba is also a DJ and rapper who played Ibiza last summer
film
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

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

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Carlton Senior Appointments: Private Banking Manager - Intl Bank - Los Angeles

    $200 - $350 per annum: Carlton Senior Appointments: Managing Producer – Office...

    Carlton Senior Appointments: San Fran - Investment Advisor – Ind Advisory Firm

    $125 - $225 per annum: Carlton Senior Appointments: San Fran - Investment Advi...

    Sheridan Maine: Commercial Finance Manager

    Up to £70,000 per annum + benefits: Sheridan Maine: Are you a qualified accoun...

    Sheridan Maine: Regulatory Reporting Accountant

    Up to £65,000 per annum + benefits: Sheridan Maine: Are you a qualified accoun...

    Day In a Page

    The week Hollywood got scared and had to grow up a bit

    The week Hollywood got scared and had to grow up a bit

    Sony suffered a chorus of disapproval after it withdrew 'The Interview', but it's not too late for it to take a stand, says Joan Smith
    From Widow Twankey to Mother Goose, how do the men who play panto dames get themselves ready for the performance of a lifetime?

    Panto dames: before and after

    From Widow Twankey to Mother Goose, how do the men who play panto dames get themselves ready for the performance of a lifetime?
    Thirties murder mystery novel is surprise runaway Christmas hit

    Thirties murder mystery novel is surprise runaway Christmas hit

    Booksellers say readers are turning away from dark modern thrillers and back to the golden age of crime writing
    Anne-Marie Huby: 'Charities deserve the best,' says founder of JustGiving

    Anne-Marie Huby: 'Charities deserve the best'

    Ten million of us have used the JustGiving website to donate to good causes. Its co-founder says that being dynamic is as important as being kind
    The botanist who hunts for giant trees at Kew Gardens

    The man who hunts giants

    A Kew Gardens botanist has found 25 new large tree species - and he's sure there are more out there
    The 12 ways of Christmas: Spare a thought for those who will be working to keep others safe during the festive season

    The 12 ways of Christmas

    We speak to a dozen people who will be working to keep others safe, happy and healthy over the holidays
    Birdwatching men have a lot in common with their feathered friends, new study shows

    The male exhibits strange behaviour

    A new study shows that birdwatching men have a lot in common with their feathered friends...
    Diaries of Evelyn Waugh, Virginia Woolf and Noël Coward reveal how they coped with the December blues

    Famous diaries: Christmas week in history

    Noël Coward parties into the night, Alan Clark bemoans the cost of servants, Evelyn Waugh ponders his drinking…
    From noble to narky, the fall of the open letter

    From noble to narky, the fall of the open letter

    The great tradition of St Paul and Zola reached its nadir with a hungry worker's rant to Russell Brand, says DJ Taylor
    A Christmas ghost story by Alison Moore: A prodigal daughter has a breakthrough

    A Christmas ghost story by Alison Moore

    The story was published earlier this month in 'Poor Souls' Light: Seven Curious Tales'
    Marian Keyes: The author on her pre-approved Christmas, true love's parking implications and living in the moment

    Marian Keyes

    The author on her pre-approved Christmas, true love's parking implications and living in the moment
    Bill Granger recipes: Our chef creates an Italian-inspired fish feast for Christmas Eve

    Bill Granger's Christmas Eve fish feast

    Bill's Italian friends introduced him to the Roman Catholic custom of a lavish fish supper on Christmas Eve. Here, he gives the tradition his own spin…
    Liverpool vs Arsenal: Brendan Rodgers is fighting for his reputation

    Rodgers fights for his reputation

    Liverpool manager tries to stay on his feet despite waves of criticism
    Amir Khan: 'The Taliban can threaten me but I must speak out... innocent kids, killed over nothing. It’s sick in the mind'

    Amir Khan attacks the Taliban

    'They can threaten me but I must speak out... innocent kids, killed over nothing. It’s sick in the mind'
    Michael Calvin: Sepp Blatter is my man of the year in sport. Bring on 2015, quick

    Michael Calvin's Last Word

    Sepp Blatter is my man of the year in sport. Bring on 2015, quick