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.
Independent Partners; request a free guide on NISAs from Hargreaves Lansdown
Culinary experts in The Netherlands thought it was 'fresh' and 'tasty'
- 1 Marijuana use by teenagers does not result in a lower IQ or worse exam results, study finds
- 2 Watch what happened when food critics were unknowingly served McDonald's
- 3 Jimmy Carr's controversial Oscar Pistorius joke goes too far at the Q Awards
- 4 Australian café owner sparks debate after saying 'No' to having unruly children on premises
- 5 NHS staff banned from drinking tea or coffee on the job because it looks like they're not working hard enough
Of course, teenage girls need role models – but not like beauty vlogger Zoella
Cameron is warned 'no possibility' of UK reducing immigration and that bid to bring in quota on migrant workers would be illegal
Support for EU membership 'at highest level since 1991' with most Brits wanting to stay 'in'
Thousands with degenerative conditions classified as 'fit to work in future' – despite no possibility of improvement
Residents should throw a street party and mix with immigrant neighbours, councils told
Russell Brand threatened with arrest after filming outside Fox News headquarters
iJobs Money & Business
£350 - £360 per day: Ashdown Group: SQL Developer with T-SQL, Watford, Hertfor...
120-150k: Accountancy Action: We are looking for an experienced CFO from a min...
£24000 - £28000 per annum + bonus & benefits: Ashdown Group: IT Business Syste...
£18000 - £23000 per annum + Commission: SThree: The SThree group is a world le...
Day In a Page
This 17th century beauty is full of rustic cosiness, while the detached home office means you can also run a business
This five-bedroom red-brick beauty overlooks the village green and sits in just under two acres of land
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
A three-bedroom, 15th-century cottage with original features in the picturesque village of Sissinghurst
A six-bedroom terraced house with large south-facing roof terrace, cinema room and wine cellar
A new seven-bedroom home built in Queen Anne-style with swimming pool and parkland views in Mortimer
A listed, four-bedroom farmhouse in the rural hamlet of Rushall with detached barn, four acres of gardens and paddocks
A first-floor flat with two bedrooms, a spacious reception room and communal grounds in a leafy part of London
A three-bedroom flat with a spacious rootop terrace and balcony, accessed from a private gated courtyard
A Grade II-listed pile with six bedrooms, stables and 39 acres of grounds in Standlake
A two-bedroom flat with boutique hotel-style interiors, close to the foodie haunt of West End Lane
A two-bedroom flat in a beautiful old vicarage, with many original features, close to the city centre
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
Chapel House is a former vicarage with nine bedrooms in the beautiful Upper Wye Valley
A five-bedroom B&B and separate owner's accomodation with potential for conversion
Enjoy summer by the Thames in this two double-bedroom converted warehouse in Rotherhithe village
A one-bedroom, luxury apartment with private gym and concierge service in Moorgate
A four-bedroom house in Hermitage Gardens with three reception rooms and landscaped gardens
A seven-bedroom Grade II-listed property with a separate self-contained apartment
A five-bedroom Victorian house with three reception rooms and galleried landing, £695,000
A six-bedroom farmhouse with five acres of land in a former cloth-making village