Payday loans – road to ruin or a lifeline?

Borrowers should be wary of taking out payday loans that they have no means of paying back, as debts can spiral
Borrowers should be wary of taking out payday loans that they have no means of paying back, as debts can spiral
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They say it’s an ill wind that blows nobody any good, but those who have turned the economic downturn to their advantage are the payday lenders.

You can’t switch on the telly without being bombarded with ads from Wonga, Payday UK, Quick Quid, or one of their competitors.

Payday loans are designed to be a short-term solution for cash-strapped people until the next pay cheque.

But a recent survey by the Consumer’s Association watchdog, Which? revealed that more than 60 per cent of people who took out instant cash payday loans of up to £1,000 were using them to pay for household bills and other essentials.

n Upsurge in debt

The rise in short term lending corresponds with a huge upsurge with the number of people getting into trouble with payday loan debts.

Gillian Guy, chief executive of Citizens’ Advice, expressed concern not just in the alarming increase in payday debt problems, but in how vulnerable people were being exposed to exploitation.

‘Four times more people are coming to us with payday loan problems compared to a couple of years ago,’ she said.

‘Worryingly, more and more people are being treated unfairly, offered loans they can’t afford to repay, and put on to rollover loans with huge interest rates and charges.

‘People in long-term financial difficulty with other debts are much more likely to take out a payday loan to try and deal with these problems.’

n Tighter rules

All short-term lends are under notice from the Office of Fair Trading to clean up their act when new rules for lenders come into force tomorrow (July 25). They’ve agreed to curb the worst abuses, including freezing interest and charges for customers in financial difficulty, and give three days’ advance notice of taking money from their bank accounts.

Citizens Advice Bureau debt advisers warn a payday loan should never be considered for long-term borrowing. If you can’t afford to repay in full once you get paid, these loans are not for you as they can amount to legal extortion.

All payday loan companies rely on being given the borrower’s permission to dip into their accounts on the agreed repayment day.

Sara Brooks, director of finance at Consumer Focus, remains concerned about default practices and believes short-term quickie loans should come with a health warning.

‘Payday loan companies are very good at presenting their products as being easy, simple, and transparent,’ she said. ‘Beneath the gloss, debt collection practices can be woefully unacceptable.’

For anyone who needs to resort to payday lenders, here’s how four of the top ones stack up:

n WONGA

Cost of borrowing £100 for one month: £37.76

Total amount repayable: £137.76

Representative APR: 4,124 per cent

Early repayment: Yes, and will save money.

Default penalties: £20 missed repayment; interest accrues for up to 60 days

Loan extensions: Three subsequent occasions

n TXTLOAN

Cost of borrowing £100 for 15 days (maximum allowable): £17

Total amount repayable: £117

Representative APR: 4,474 per cent

Early repayment: Yes, but savings may be minimal.

Default penalties: Admin fee, £25, plus interest of £1.13 per day = £143.13 after day 17 and £200 after day 47.

Loan extensions: No

n QUICK QUID

Cost of borrowing £100 for 31 days: £25

Total amount repayable: £125

Representative APR: 1,734 per cent

Early repayment: Yes, but you need to contact customer services first

Default penalties: £12 missed payment fee, plus interest

Loan extensions: At discretion of lender plus additional interest.

n PAYDAY EXPRESS

Cost of borrowing £100 for 28 days: £25

Total amount repayable: £125

Representative APR: 1,737.2 per cent

Early repayment: Yes, but will not save any money

Default penalties: £15 if not repaid on time.

Loan extensions: Can extend loan to next payday, but the full amount borrowed plus interest will be become due.