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

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

News
Netherlands' goalkeeper Tim Krul fails to make a save from Costa Rica's midfielder Celso Borges during a penalty shoot-out in the quarter-final between Netherlands and Costa Rica during the 2014 FIFA World Cup
newsGoalkeepers suffer from 'gambler’s fallacy' during shoot-outs
News
people
Travel
travel
Arts and Entertainment
Sydney and Melbourne are locked in a row over giant milk crates
artCultural relations between Sydney and Melbourne soured by row over milk crate art instillation
PROMOTED VIDEO
Arts and Entertainment
Adèle Exarchopoulos and Léa Seydoux play teeneage lovers in the French erotic drama 'Blue Is The Warmest Colour' - The survey found four times as many women admitting to same-sex experiences than 20 years ago
arts + entsBlue Is The Warmest Colour, Bojack Horseman and Hobbit on the way
News
Two giraffes pictured on Garsfontein Road, Centurion, South Africa.
i100
Environment
View from the Llanberis Track to the mountain lake Llyn
Du’r Arddu
environmentA large chunk of Mount Snowdon, in north Wales, is up for sale
News
Kenny Ireland, pictured in 2010.
peopleBenidorm, actor was just 68
News
i100
Arts and Entertainment
arts + ents
News
people
News
Morrissey pictured in 2013
people
News
A scene from the video shows students mock rioting
newsEnd-of-year leaver's YouTube film features playground gun massacre
News
i100
Life and Style
The director of Wall-E Andrew Stanton with Angus MacLane's Lego model
gadgetsDesign made in Pixar animator’s spare time could get retail release
News
peopleGuitarist, who played with Aerosmith, Lou Reed and Alice Cooper among others, was 71
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Training Programme Manager (Learning and Development)-London

    £28000 - £32000 per annum + benefits: Ashdown Group: Training Programme Manage...

    1st Line Support Technician / Application Support

    £20000 - £24000 per annum: Harrington Starr: A leading provider of web based m...

    Team Secretary - (Client Development/Sales Team) - Wimbledon

    £28000 - £32000 per annum: Ashdown Group: Secretary (Sales Team Support) - Mat...

    Accountant / Assistant Management Accountant

    Competitive (DOE): Guru Careers: We are looking for an Assistant Management Ac...

    Day In a Page

    Dress the Gaza situation up all you like, but the truth hurts

    Robert Fisk on Gaza conflict

    Dress the situation up all you like, but the truth hurts
    Save the tiger: Tiger, tiger burning less brightly as numbers plummet

    Tiger, tiger burning less brightly

    When William Blake wrote his famous poem there were probably more than 100,000 tigers in the wild. These days they probably number around 3,200
    5 News's Andy Bell retraces his grandfather's steps on the First World War battlefields

    In grandfather's footsteps

    5 News's political editor Andy Bell only knows his grandfather from the compelling diary he kept during WWI. But when he returned to the killing fields where Edwin Vaughan suffered so much, his ancestor came to life
    Lifestyle guru Martha Stewart reveals she has flying robot ... to take photos of her farm

    Martha Stewart has flying robot

    The lifestyle guru used the drone to get a bird's eye view her 153-acre farm in Bedford, New York
    Former Labour minister Meg Hillier has demanded 'pootling lanes' for women cyclists

    Do women cyclists need 'pootling lanes'?

    Simon Usborne (who's more of a hurtler) explains why winning the space race is key to happy riding
    A tale of two presidents: George W Bush downs his paintbrush to pen father’s life story

    A tale of two presidents

    George W Bush downs his paintbrush to pen father’s life story
    Restaurateur Mitch Tonks has given the Great Western Pullman dining car a makeover

    The dining car makes a comeback

    Restaurateur Mitch Tonks has given the Great Western Pullman dining car a makeover
    Gallery rage: How are institutions tackling the discomfort of overcrowding this summer?

    Gallery rage

    How are institutions tackling the discomfort of overcrowding this summer?
    Louis van Gaal has £500,000 video surveillance system installed to monitor Manchester United players

    Eye on the prize

    Louis van Gaal has £500,000 video surveillance system installed to monitor Manchester United players
    Women's rugby: Tamara Taylor adds fuel to the ire in quest to land World Cup

    Women's rugby

    Tamara Taylor adds fuel to the ire in quest to land World Cup
    Save the tiger: The day America’s love of backyard tigers led to a horrific bloodbath

    The day America’s love of backyard tigers led to a horrific bloodbath

    With only six per cent of the US population of these amazing big cats held in zoos, the Zanesville incident in 2011 was inevitable
    Samuel Beckett's biographer reveals secrets of the writer's time as a French Resistance spy

    How Samuel Beckett became a French Resistance spy

    As this year's Samuel Beckett festival opens in Enniskillen, James Knowlson, recalls how the Irish writer risked his life for liberty and narrowly escaped capture by the Gestapo
    We will remember them: relatives still honour those who fought in the Great War

    We will remember them

    Relatives still honour those who fought in the Great War
    Star Wars Episode VII is being shot on film - and now Kodak is launching a last-ditch bid to keep celluloid alive

    Kodak's last-ditch bid to keep celluloid alive

    Director J J Abrams and a few digital refuseniks shoot movies on film. Simon Usborne wonders what the fuss is about
    Once stilted and melodramatic, Hollywood is giving acting in video games a makeover

    Acting in video games gets a makeover

    David Crookes meets two of the genre's most popular voices