Payday lenders, famed for offering short-term loans at sky-high interest rates, are moving into the medium-term loan market offering 12-month loans with three-digit interest rates.
Pounds to Pocket and brokers FlexCredit and 12monthloans.co.uk all offer access to loans designed to be repaid over a year at an extortionate APR of 278 per cent. That means if you borrowed £500 for a year you would pay back £79.09 a month, a total of £949.01 which includes an interest bill of £449.01. If you borrowed £2,000 you'd end up repaying £3,796.32 over 12 months.
The 12-month loans appear to work on the same premise as payday loans – a quick online application process, limited credit checks and the money in your account within 24 hours. All you need to be eligible is a bank account, a job and to be aged 18 or over.
Payday loans sprang up in the UK when the credit crunch hit. An import from the US, they generally charge about £25 for every £100 borrowed with the money repaid within 28 days, ie on your next payday. However, charges can spiral if repayments aren't made on time and payday loans have typical APRs of 1,300 per cent upwards. Payday firms typically advertise on daytime TV, a strategy which some critics suggest targets the unemployed.
A Which? investigation uncovered widespread poor practice in the payday loans market, including potential breaches of the Consumer Credit Act, poor privacy provisions and inflated APRs. Labour MP for Walthamstow, Stella Creasy, has campaigned for a crackdown on payday firms and has called – to no avail so far – for a cap on the interest they charge.
Payday firms extending their reach into the 12-month loan market is a worrying move. The firms typically defend their sky-high interest rates on 28-day loans by saying that the loans are designed to be repaid in a month and therefore the APR doesn't offer a fair comparison of the costs with other forms of credit over the same short time period.
But, obviously, this argument does not stand up when it comes to 12-month loans. The APR or annual percentage rate offers a clear comparison of the costs.
If you miss a payment with Pounds to Pocket you'll be charged a penalty fee of £12. According to the website, "if you miss a certain amount of consecutive payments, we may accelerate the full balance of your obligations to us and the entire outstanding balance plus all accrued and unpaid interest that is owed will be declared due and payable".
Una Farrell, a spokeswoman for the Consumer Credit Counselling Service, says this type of high-cost credit can lead to serious debt problems.
"Unfortunately, the economic downturn has seen a mushrooming of this type of loans as many families struggle to make ends meet," she says, "Advertising on daytime television is a cynical way to market an expensive product towards those who aren't working and likely to be short of cash. I would urge anyone considering taking out one of these loans to shop around for cheaper forms of credit."
If you compare the cost of Pounds to Pocket and the loans offered through FlexCredit and 12monthloans.co.uk with the high street, the difference is quite staggering as the table shows. A £2,000 loan with the Post Office at 14.9 per cent repaid over 12 months would cost £154 in interest over a year, whereas you would pay almost that much a month with less scrupulous lenders. Monthly payments would be £179.55 with the Post Office and £316.36 with one of the online lenders.
"With high street banks adopting a more cautious lending approach there will be more people tempted to borrow from these loan companies charging extortionate rates of interest," says Andrew Hagger of Moneynet. "The problem for borrowers with minor credit issues is that there's no half way house. If you can't borrow from the bank at 18 to 20 per cent APR, then you are looking at having to pay over 270 per cent. There doesn't seem to be anything in between. Lenders are taking advantage."
Both Ms Farrell and Mr Hagger agree that financial exclusion is at the heart of the issue, where people feel unable to, or are unable to, seek credit from the mainstream banking system. "It is important that people open bank accounts and do what they can to improve their credit rating such as putting their name on the electoral register," says Ms Farrell. "They shouldn't be afraid of seeking credit from a bank just because they haven't before."
FlexCredit and 12monthloans.co.uk, which broker loans from a range of lenders, are trading names of PDB UK Ltd. PDB stands for Pay Day Bank, which also has operations in Australia, Canada and the US. Pounds to Pocket is part of Chicago-based Enova Financial Ltd which in turn is part of the Cash America International Inc. None of the firms responded to The Independent on Sunday's questions about lending industry practices prior to initial publication.
The above article was amended after initial publication to reflect the fact that FlexCredit and 12monthloans.co.uk are loan brokers, rather than direct lenders.
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