Should you profit from expensive payday loans?

Firms offering to put ordinary people in touch with each other to borrow or lend offer an alternative to banks.

Ordinary people now have the chance to profit from the payday lending boom. A new lender launched this week hopes to persuade people to put up the cash to lend to others who are willing to pay for expensive short-term credit.

In return, those who put up the cash are being tempted by an average yearly return of 12 per cent on their money – around four times as much as they would expect to get through a traditional savings account at the moment.

The deal is being offered by The Lending Well, the latest in a growing number of peer-to-peer lenders to appear. The longest established peer-to-peer lender is Zopa, which has offered mainstream loans since 2005.

Many others have arrived and been very successful, including The Funding Circle, which offers loans to fledgling businesses. That firm says investors are achieving annual returns of around 8.4 per cent.

In fact, earlier this month the Bank of England's financial stability director, Andy Haldane, said peer-to-peer lenders could ultimately replace conventional banks.

The peer-to-peer proposition is simple and attractive. Ordinary folk lend to other ordinary people at rates they agree between themselves. With no bankers involved, both borrower and lender can get a much better deal than they do from the banks.

That's all very well, but is payday lending a step too far? Tim Slesinger, the founder of The Lending Well, thinks not. "I'm not going to defend the payday loans industry as there are lots of things wrong with it," he said. "But we think we can offer better terms to responsible borrowers.

"Payday borrowing is an industry ripe to be shaken up and our approach will deliver benefits for both sides of the equation."

Anyone turning to the website to borrow will be charged £1 a day per £100 borrowed. Compared to existing payday lenders, many of which have fixed charges, that deal could work out much better. Anyone borrowing £200 today until the end of next week, for instance, would be charged £25-£30 at well-known payday lenders. At Living Well the charge – for seven days borrowing – would work out at £14.

Mr Slesinger also says the business will turn down 90 per cent of prospective borrowers, turning down people with loans elsewhere, for instance. "We're not looking to lend to the financially vulnerable," he said. "We want this business to be ethical for borrowers and lenders."

As part of that it has put a cap on the amount anyone will owe the firm to twice the amount initially borrowed. Other payday lenders rollover loans time after time, one of the key reasons that people fall into a debt spiral, when they quickly owe more than they could ever hope to repay.

It's good news that the firm is seemingly being more decent about its lending activity, but does that make it a good proposition for those looking to get better returns on their cash?

Making fat profits from vulnerable people is abhorrent, which is why many payday lenders – which appear to do just that – are criticised. Will many ordinary people be happy to be part of such a questionable industry? It seems unlikely.