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.
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