The sky-high loans of last resort that tide you over till payday
'Overpriced, overused and over here' – is there anything to be said for American-style, short-term offers? Emma Lunn investigates
Sunday 20 April 2008
Debt-ridden consumers are being targeted by loan companies lending money at annual percentage rates (APRs) of up to 1,355.
A number of "payday loan" providers have recently sprung up in the UK, several of them advertising on the social networking website Facebook, typically frequented by indebted young adults.
Payday loans are common in the US and have been blamed for exacerbating that country's housing and economic crises – and now they are over here too. Experts warn that they are likely to become big business as the credit crunch hits people with less than perfect credit records who cannot get loans from banks and building societies.
"These truly ugly loans are overpriced, overused and over here," says Laura Starkey, a financial expert at price comparison site fool.co.uk. "Brits are falling victim to this form of borrowing when they should be fleeing from it."
A quick Google search reveals dozens of online lenders promising to pay up to £750 into your bank account within hours of receiving your application. Payday UK, QuickQuid, ePayday, Payday Express and Samedaymoney all claim to be the answer to financial woes.
Basically, the loans are cash advances on the salary you're expecting at the end of the month. Once you've received your wages you repay the lender. In most cases, all you need to qualify is to be over 18 years old, have a full-time job, a bank account and a debit card. The debt is repaid on payday either by a post-dated cheque or by debit card.
"If you're short of cash at the end of the month and need emergency money to tide you over till payday, then they seem like a solution," says Sean Gardner, chief executive of price comparison site MoneyExpert.com. "Generally they allow you to borrow between £80 and £750 and they charge £25 for every £100 borrowed. If you take a loan of £500 you will repay £625, for instance."
That's expensive by anyone's standards but the charges can spiral out of control should the borrower fail to pay their loan back when payday arrives. Payday UK, for example, which advertises on Facebook, charges £25 per £100 borrowed, but if you fail to pay it back on payday it adds on another £25 charge per £100, which would equate to £31.25 (£25 per £100 of a £125 debt). Fail to clear any of the loan for, say, six months and you will be looking at having to repay nearly £400; if you don't make any payments for a year, it will cost you almost £1,400.
The site admits that this equates to an APR of 1,355 but to some extent the APR is a false measure, as the loan is intended to be taken out over a month, rather than a year, which is why the rate comes out so high. A spokesman for MEM, which runs Payday UK, adds that the company checks customers' creditworthiness to ensure they can meet the repayments, and that its loans are cheaper than the alternatives, which include "bouncing cheques or incurring unauthorised overdraft fees, both of which can work out considerably more expensive to the customer than the equivalent charges on a payday loan".
Tim Moss, head of loans at comparison website Moneysupermarket.com, says that the APRs involved may seem "extortionate" but stresses that payday loans are intended to be taken out only as stopgaps: "It's important to remember they should have a maximum term of 30 days." And he adds: "Payday loans are a bit like taxis – convenient for short journeys, but if you're going a long way, there are much cheaper ways to travel."
As well as having to contend with high charges, borrowers may find that paying off the loan leaves them struggling financially the following month. It is easy to get into a vicious circle, either by taking out a loan every month or letting the charges on existing loans add up because you haven't repaid the debt.
"People should be careful to avoid using payday loans too often," says Mr Moss. "Some payday loan companies limit advances to a maximum of four per year. My advice is to borrow in this way no more than twice a year, and only when it's absolutely necessary and you are sure you can pay it back quickly."
Payday loan firms have sprung up at a time when the UK's debt problems seem to be getting worse. Figures released last month by the Citizens Advice Bureau show that debt is now the number-one issue its advisers deal with. The charity reports a sharp increase in people seeking help who have fallen behind with mortgage repayments, or who are struggling to pay utility bills and council tax.
Meanwhile, Frances Walker of debt charity the Consumer Credit Counselling Service (CCCS) says her organisation is starting to see more and more clients who have taken out payday loans – mostly young, single people living in rented accommodation.
"The people who use payday advance lenders are those for whom all other options are severely limited," says Ms Walker. "They are less likely to have a partner's income to fall back on, or to be able to obtain a loan against property. Being younger, they are also less likely to have had an opportunity to build up a positive credit history, which will make it difficult for them to obtain standard credit cards or loans."
Other loans with eye-watering APRs can be secured on your car. Logbook Loans, for example, which also advertises on Facebook, will lend to anyone who legally owns their car (clear of finance), regardless of whether or not they have a good credit history. It charges a massive 343.4 per cent interest and your car is at risk if you cannot keep up repayments.
Despite the credit crunch there are still some good deals out there from mainstream lenders for those who need to borrow. Homeowners can release equity through remortgaging, securing the loan against their property to get interest rates as low as 5.9 per cent – some 2.5 percentage points cheaper than the average rate on unsecured loans for balances of £15,000.
Will your credit card rewards be scrapped following new EU rules on charges?
Sean O'Grady: 'Hedge your bets on the election - you'll feel much better if you lose'
What would happen if you put a statistician in a casino with £1m?
10 tips for taking out a personal loan
Simon Read: 'The fight must go on over equality on expat pensions'
- 1 I've been called an abusive and dangerous parent, when all I did was listen to my transgender child
- 2 Migrant crisis: Greek soldier saved 20 people singlehandedly off Rhodes beach
- 3 Sofyen Belamouadden murder: The inside story of a crime that horrified Britain
- 4 Company breaks open Apple Watch to discover what it says is 'planned obsolescence'
- 5 Ian Brady: Moors murderer announces his support for Ukip and the SNP
General Election 2015: Chuka Umunna on the benefits of immigration, humility – and his leader Ed Miliband
The sickening truth about food banks that the Tories don't want you to know
Migrant boat disaster: Ukip candidate mocks victims in sickening Twitter post
Nigel Farage wants the BBC to stop making programmes like Doctor Who, Strictly Come Dancing, and Top Gear
Global warming: Scientists say temperatures could rise by 6C by 2100 and call for action ahead of UN meeting in Paris
General Election 2015: Britain would become a 'communist dictatorship' under Ed Miliband and Nicola Sturgeon, claims wife of Michael Gove
iJobs Money & Business
£24000 - £26000 per annum + benefits : Ashdown Group: A highly successful, glo...
£50000 - £55000 per annum: Ashdown Group: Business Analyst - Financial Service...
£18000 - £23000 per annum + OTE £45K: SThree: At SThree, we like to be differe...
£20000 - £25000 per annum + competitive: SThree: Did you know? SThree is the o...
Day In a Page
This six-bedroom home is set amongst three acres of grounds. Currently a large family home, Clift Hill has potential to make a B&B, subject to change of use permissions.
A former period coach house, Glebe Farm Stable is now a three-bedroom cottage with a double car barn, office, kennels and an outbuilding that's currently used as a gym.
Set sail for this four-bedroom farmhouse in Cowes. With five acres of land and an indoor pool, this home oozes character. There is even potential to let a one-bedroom annexe.
Surrounded by woodland, this five-bedroom manor house has plenty of outdoor storage space in the form of three converted loose boxes, two smaller outhouses and a woodstore.
This four-bedroom detached home comes with a double carport, useful workshop, garden and two walkways that offer views of the adjacent countryside.
With space for an equestrian business, a greenhouse for growing your own veg, a wine store and a gym; this five-bedroom home has all the ingredients for a country retreat.
This four-bedroom home has exposed brick chimneys and a vaulted ceiling in a breakfast room that's ideal for summer entertaining - the doors open to the patio and garden.
The decked roof terrace of this two-bedroom flat is perfect for summer drinks while large windows and ample storage space make for a light and spacious interior.
Surrounded by approximately 15 acres of grounds, this six-bedroom grade II-listed home has been extensively refurbished yet retains many period features.
This four-bedroom home comes with a two-bedroom cottage and commercial office, with planning to extend, in a stunning courtyard setting.
In a pretty Norfolk village, this four-bedroom family home is surrounded by landscaped gardens, with even a self-contained annex for guests.
A few miles from the seaside at Perranporth, this four-bedroom farmhouse sits amongst nine acres of idyllic grounds - including a lake and two barns used as holiday lets.
This five-bedroom home is arranged over three floors of a converted Victorian hospital, offering spectacular views of the Pentland Hills - only three miles from the city centre.
This four-bedroom detached home comes with grounds that span to approximately 2.5 acres, as well as two large patio areas and a double garage.
This four-bedroom cottage is a Grade II-listed town house, well-located for the thriving market town of Nailsworth.
A four-bedroom apartment on the ground floor of a stunning period property in North Yorkshire, with two kitchens and a large south-west facing garden.
This high-spec two-bedroom home is part of a smart collection of new flats at Beaufort Park and has a large decked balcony that's perfect for summer drinks.
Capitalise on the fabulous views of Trevone Bay by taking two homes and creating one spacious boutique B&B. Just a cliff-top walk from Padstow.
Overlooking a golf course, this six-bedroom Edwardian detached home spans four storeys and retains many period features including the original, operational servants' bells...
On the edge of the city, this six-bedroom home comes with an outdoor swimming pool and a large garage block that has annexe potential.
In a Grade II-listed manor just outside of Bath, this three-bedroom home is arranged on two floors with a skylight in a vaulted roof line.
Open the living room's bi-fold wooden doors to reveal a retro-style kitchen, and a conservatory leading to a paved garden at this three-bedroom home.
A Grade II-listed, four-bedroom home, in a charming Somerset village, with a two-storey studio that could be converted into a holiday cottage
A modern four-bedroom Victorian home, within walking distance to the high street
A luxury apartment in the Gothic mansion of Wyfold Court in Kingwood, offers six bedrooms spread over three floors and a turret
This school conversion, near Stockwell Tube, oozes New York loft style. The one-bedroom flat features double height ceilings and exposed brick work
This six-bedroom Georgian home is on three floors with open fireplaces, a two-oven Aga, an annexe, and cottage gardens with outbuildings and a car barn
High Crest House covers an impressive 9384sq ft, with almost three acres of grounds including a tennis court and summer house enclosed by electric gates
A six-bedroom farmhouse with separate accommodation in converted stables. Situated in the village of Church Aston, within walking distance to the market town
A two-bedroom flat with under-heated walnut floors and bespoke built-in storage. The Tube and Clapham Common are a short stroll away
A refurbished seven-bedroom townhouse with staff quarters, cinema room, superb gym, steam room and plunge pool
A minimnalist four-bedroom home designed to the highest spec, featuring glass walls and a kitchen space lit by a glass roof
Hibernate during winter and make your living during the summer at this busy guesthouse with panoramic sea views, in the village of Lynton
A four-bedroom penthouse next to the Tate with direct views of St Paul's from two floors of luxurious living space
A four-bedroom detached home surrounded by spacious gardens and woodland, close to New Pudsey
An 18th-century, three-bedroom home near Langstone Harbour built from ships beams with vaulted ceilings and wood burning stoves
A five-bedroom semi-detached home with a mix of period and modern features in a popular and convenient location
This five-bedroom red-brick beauty overlooks the village green and sits in just under two acres of land
A three-bedroom villa with self-contained flat, minutes from Lake Windermere
A five-bedroom Victorian home with four receptions, superb gardens and paddock in Pembury
An eight-bedroom house on the south side of the The Green with cinema, wine cellars and summer house
This 17th century beauty is full of rustic cosiness, while the detached home office means you can also run a business
Four exclusive apartments in a Grade II-listed former medical school with 2,275 sq ft of living space and 18ft ceilings
A five-bedroom terraced house on the popular Peterborough Estate, ideally located for both Eel Brook Common and South Park
A state-of-the-art farm-building conversion on the former Cliveden Estate, with 11,420sq ft of internal space, cinema and wine cellar
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
A boutique mews house, set around a central courtyard, with three bedrooms and a private roof terrace
A four-bedroom farm-conversion with three bathrooms and two reception rooms