Tempting free loans target those most at risk

A free loan offer launched this week could prove disastrous for hard-up families, a debt charity has warned. "It's just a way to snare people into paying sky-high rates," said Una Farrell of the Consumer Credit Counselling Service.

The chance to borrow money at 0 per cent interest is being offered from next Wednesday by the payday loan company InstantLoansDirect.com. Its founder, Giles Coutts, said: "We're hoping we can help consumers at a time when they might be struggling financially."

But Ms Farrell scoffed at that claim. "Payday loans are to financial wellbeing what Christmas is to turkeys," she said.

The deal sounds tempting: anyone earning £750 a month or more can borrow up to £300 for up to eight days and pay no interest. The offer will be available for an eight-day period prior to the end of the next five months.

Those finding things getting a bit tight a few days before payday could think the cash is a godsend. With the Christmas and New Year period traditionally being the most expensive time of the year, it's obvious why the loan company has launched the deal now. It clearly hopes that many hard-up families are tempted.

But anyone who does take up the offer will find there's a potential sting in the tail. If you don't pay back the loan within eight days, the charges start, and they're not cheap. The loan firm says the charges are only 50p a day for every £100 borrowed. That sounds reasonable until you realise it works out at an APR of of 448.3 per cent.

To put it another way, if you borrow £300 and do not pay it back until a month later, you will be charged £33. For every further day you delay, another £1.50 will be added to the bill. Often payday loan firms then approach people who have failed to meet repayment deadlines and make new loan offers.

But what happens is that interest is rolled up and added to the loan, making people borrow more money. Further interest is then charged, often at a higher rate than the original deal. The net result is that the debt can quickly grow and get out of hand, leaving people owing much more than they borrowed in the first place.

"I am very concerned that many people are going to get a nasty shock and find themselves lumbered with huge debts after taking out what they thought was cheap credit," said Ms Farrell.

The loan firm's Mr Coutts denied that he was "out to make a quick buck". Instead, he claimed he hoped "to highlight the usefulness a payday loan can provide". Payday loans can be useful if you can definitely pay them back. They can also lead to debt disaster.