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Loans & Credit

Simon Read: Pets and sweethearts are this week's payday loan targets


Payday lenders are all set to become more mainstream, if you believe the accountancy firm PricewaterhouseCoopers. The bean counters said in a report published this week that they've seen increasing evidence of consumers seeking alternative finance such as payday loans.

High-cost, short-term lenders have come under increasing criticism in recent years. The main complaint is that they encourage vulnerable people into debt they can't afford.

But PWC suggests something else is happening too: that better-off people are turning to payday lenders. "The convenience and innovation offered by alternative lenders are encouraging a broader and more prosperous selection of consumers to choose their services over banks," PWC said.

Convenience is about all there is to recommend most payday loan firms. If you need money in a hurry and are prepared to pay well for the privilege, they can deliver. But their methods of publicising their products are questionable and, some would say, downright irresponsible.

Last month, for instance, I was told about a payday lender called Cash Genie which encouraged students to use its expensive credit to pay for booze or nights out in articles published on its website. After I contacted the firm – which offers loans at 2,339 per cent APR – it, to its credit, removed the articles.

This week saw the launch of a new payday company which targets pet owners. Petloan aims its expensive short-term loans at animal lovers who are suddenly faced with unexpected vet's bills. The company's quoted APR? 2,120 per cent.

Targeting people in distress – as owners of injured or ill pets will undoubtedly be – smacks of something unpleasant. It's true that pet owners may need to find cash quickly to pay for medical treatment for their animal, but it is likely to be cheaper to arrange an overdraft.

Pet owners could prepare for a medical eventuality by taking out insurance. Cover has become reasonably affordable in recent years. Alternatively, it's an idea to set a little aside to have some cash to fall back on in an emergency rather than pay through the nose for a short-term loan.

Another loan firm has been busy targeting the romantic among us by offering instant loans to pay for a Valentine's night out. Cash Lady's quoted APR is 1,737 per cent. But if you're tempted to borrow £180 to pay for a slap-up Valentine's meal or night on the tiles you'd have to repay £225. For an interest charge of £45 for one night's money, I'd hope it was worth it!

But back to the bean counters at PWC. They're predicting that the next step for payday lenders is to start offering more traditional financial services, such as credit cards, longer-term loan products or even current accounts.

Frankly that would be something to welcome, as they would be forced to toe the line and adopt better lending practices. That would be good news.

Santander this week made it harder for borrowers to qualify for an interest-only mortgage. The Spanish-owned bank has doubled the amount of deposit needed to get a loan, increasing it from 25 per cent of the value of a property to 50 per cent.

I've never been a fan of interest-only mortgages. Years ago they were only sold alongside a separate investment which borrowers had to take out to repay their loan. But somewhere along the way that crucial requirement was quietly forgotten.

It was partly on the back of rampant house inflation that lenders became so lax. They knew that even if borrowers weren't reducing the amount of their loan, they were actually increasing the amount of equity in their property by dint of rising property prices.

It's easy to see why interest-only mortgages are popular with borrowers. The monthly repayments are lower. But the long-term costs are much higher. As a simple rule of thumb, if you take out a standard rate mortgage and pay interest over 25 years, you'll end up paying twice as much for the property than you agreed.

So if you were to pay £500,000 for a home, the total cost of it – if you didn't repay any of the loan early – could eventually top £1m. You can do similar sums with any borrowing as interest, particularly spread over years, very quickly adds up.

I know interest rates are low now, but they won't remain so for ever, so imagine you took out £100,000 mortgage over a 25-year period, and paid an average interest of 6 per cent. If you overpaid every month by just £100 you would save £26,892.54.

Not only that, you would cut the term of the mortgage, as the net effect of the overpayments would mean you'd be eating into the capital – the amount originally borrowed – much more quickly. In fact in the example, paying an extra £100 a month would cut six years and four months off the life of the mortgage.

For that reason I hope that other lenders follow Santander's prudent lead and make it much harder to qualify for an interest-only loan. They can be useful, if you know you're going to come into some money and be able to pay off the loan.

But unless you know you've got a certain legacy or an assured bonus, an interest-only mortgage is simply storing up a huge expensive financial headache for the future.

L ast week I took the Money Advice Service to task for spending £40.5m on 16 debt advisers. I'm happy to admit I made a mistake. In fact the cash will pay for 16 debtadvice "providers" who, in turn, will employ approaching 500 individual debt advisers.