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MPs concerned by payday loans

Emma Lunn
by Lovemoney Staff Emma Lunn on 22 June 2011  |  Comments 9 comments

This is one way to borrow you really want to avoid...

MPs concerned by payday loans

It’s not just Wonga.com’s irritating jingle that’s wrong with payday loans: short-term lending can come with massive costs too.

The shocking APRs – sometimes up to 4,000% - on payday loans haven’t gone unnoticed. MP Stella Creasy is leading the charge to cap the cost of payday loans and other short-term lending, and is due to meet with the Financial Secretary to the Treasury Minister Mark Hoban soon to discuss the subject.

What are payday loans?

Payday loans are a form of short-term borrowing aimed at struggling consumers who need to bridge the gap until their next payday. The amounts offered to consumers by payday loan companies usually range from £100 to £300, but can be up to £1,000.

One of the main selling points of the loans is speed.  In most cases all borrowers need to qualify for a loan is to be over 18-years-old, have a full time job, a bank account and a debit card. If an application is successful, money can be transferred into the borrower’s account on the same day.

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The idea is that the money is only lent for a short amount of time: i.e. until payday which tends to be 30 days or less away assuming people are paid monthly. The debt is re-paid on payday either by a post-dated cheque or by debit card.

How much do payday loans cost?

Due to their short term nature payday loans carry extremely high interest rates, some as high as 4,000% when converted to an annual percentage rate (APR).

However, converting the interest rate of a pay day loan to an APR can be misleading as it takes into effect compound interest and assumes you’ll borrow the money for a year when that’s not what payday loans are designed for.

That said, they’re still expensive even if you only borrow cash for a short amount of time. A quick play on Wonga.com’s slide-rule shows how much it can be.

For example, borrowing just £300 for two weeks will cost you £47.68. Borrowing the same amount for 28 days will cost you £89.87.

After that the charges can spiral if you cannot pay the money back quickly. If you can’t pay Wonga.com back on the day your debt is due you’ll incur a £20 missed payment fee and your account will be handed to the firm’s professional collections team. Interest will continue to accrue on your balance and you could soon find your debt is unmanageable.

Creasy says one of her constituents was being chased by Wonga, for £1,600 as she was 40 days late in paying - but she only borrowed £800 in the first place.

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As well as high charges, borrowers may find that repaying the loan on payday leaves them struggling by the end of the next month and it is easy to get into an expensive 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.

Other high-cost borrowing to avoid

Other loans with extortionate APRs can be secured on your car. Logbook Loans, for example, will lend to anyone who legally owns their car (clear of finance) regardless of whether or not they have a good credit history.

Its website shows it charges an APR of 478.30% but, again, the idea is that the loan is short-term and so the APR should, in theory, not mean that much.

It’s still not a good way to borrow though; fail to pay the loan back and the lender can drive off with your car.

Better ways to borrow

If you have a decent credit rating, then a credit card with a 0% introductory offer on purchases is normally the cheapest way to borrow. There are a number of really good deals around – up to 15 months interest-free with M&S Money or Tesco. For more on these great cards, have a read of New card offering 15 months 0% on spending.

The personal loan market also has some good deals at the moment. Nationwide is offering a 6.8% loan for new applicants as well as a market leading 6.70% rate for existing FlexAccount customers while you can also get a rate of 6.70%. Rival Alliance & Leicester offers 6.7% on unsecured loans of up to five years between £7,500 and £14,950 (available to both new and existing customers). Have a read of New market-leading 6.7% loan.

Your current account overdraft is another option. Authorised overdrafts are cheaper than unauthorised ones so check with your bank that it’s happy for you to slip into the red and find out how much it will cost you.

There are plenty of far cheaper ways to borrow than with a rip-off payday loan!

More: Compare 0% credit cards | Don’t make this £335m holiday mistake | Help! I can’t get a mortgage!

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Comments (9)

  • louloubelle
    Love rating 0
    louloubelle said

    The only way for such loan sharks to be put out of business is for everyone to default. Simply report your debit card lost or stolen, or better still, open a basic bank account, so no further payments may be made.

    Report on 22 June 2011  |  Love thisLove  0 loves
  • BGM
    Love rating 7
    BGM said

    these services are evil and should be made illegal imo

    Report on 22 June 2011  |  Love thisLove  0 loves
  • EastExpert
    Love rating 30
    EastExpert said

    At one point they say "but we can't compute APR for a year, as there is no compound interest lasting a year", but just a few lines later, we read that "After that the charges can spiral if you cannot pay the money back quickly" -- that's exactly the point why these payday loans are so vile, because compound interest is in fact present, and exponent grows very quickly...

    Let's say if in 2 weeks you incur 41% on top, then twice that is 1.41 * 1.41 = 2.00 (100% on top), then three times 182% on top, then 300%... you see the sequence!

    There is no way people struggling till next payday can afford these interests.

    In fact we must admit that this is mafia types preying on the vulnerable members of society -- rip off interest, if unpaid taking charge on people's cars, personal possessions... hiring collectors and hitting people with further charges attracting further interest for these collectors -- looks like a real assault on the borrowers, outright robbery.

    Arguments "they can choose not to go there" are futile. Often people who are forced to go to loan sharks have no other ways of getting survival money. Banks have turned their back to them. No overdraft, no credit card ("Your rating is not good enough Sir") -- and no choice. This is very unfair that banks can rake in huge profits and still be able to claim not to be able to offer these people any loans/overdrafts.

    I second that these loans must not be capped, but they must be totally eliminated from the market and made illegal. Heck even the older societies had laws (both secular and religious) against usury! The modern UK seems to have none.

    Banks must step in and provide a realistically priced services for these people like overdraft or credit card. (And not be allowed to "pass the cost to the rest of the customers" -- by law).

    Cheers.

    Report on 22 June 2011  |  Love thisLove  1 love
  • CuNNaXXa
    Love rating 362
    CuNNaXXa said

    Again, this is yet another attack on those most vulnerable, as someone who is affluent would have no need for a payday loan.

    So, wonga and co. are more than happy to see the poor remain poor, while their investors are raking in the profit.

    We need a government who will actively look after the poor, rather than just talk about it (and I am not just talking about the current governments. They are all as bad as each other).

    If someone NEEDS to borrow money from one month to the next (genuinely) to get by, it says a lot for our country, where we are supposed to have a socialist mandate. Companies like wonga are taking advantage of the situation to exploit the poor.

    Report on 22 June 2011  |  Love thisLove  0 loves
  • vulcanite
    Love rating 31
    vulcanite said

    Companies like Wonga and all the rest of the Payday loan brigade should be put out of business tomorrow. Loathsome sharks purporting to provide a 'social' service. How I wish I could be the Chancellor for just one day. There should be in place an appropriate form of short term lending for those who have a short term financial 'embarrassment', I for one as a considerable, (and fortunate) taxpayer would be very happy to subsidise such an arrangement.

    Report on 22 June 2011  |  Love thisLove  0 loves
  • sodit
    Love rating 127
    sodit said

    These companies are just disgusting in the way they're taking the bread from the mouths of honest local loan sharks.

    Report on 22 June 2011  |  Love thisLove  0 loves
  • Steviebaby1959
    Love rating 28
    Steviebaby1959 said

    Why has it taken so long for someone to investigate this practice, since it was first brought into the public gaze as long ago as June 26th 2008, in The Times??

    Ever since the TV adverts for companies, such as, QuickQuid, Wonga, etc, hit our screens, going back to 2009 don't forget, it appears that everyone queried the interest rates, of these short term loans, yet, nobody seems to have done anything about it.

    As legitimate companies, I have no complaints over many of these institutuions, and the service they provide, although, I've never had a personal reason to use them, but, many have and they've had their loan money and now need to pay it back in the specified time. If they've read the terms and conditions of these organisations, they don't really have any choice, it's no use making excuses, you borrow money you pay it back, even if the interest is 500000000 %, you agreed to it by clicking on the website button.

    Report on 23 June 2011  |  Love thisLove  0 loves
  • Thirdman
    Love rating 10
    Thirdman said

    I'm going to go against the grain here and stand up for, (to a certain extent) these loans.

    Firstly, you mention the better ways to obtain loans- credit cards and bank loans. These are no good if you don't have a good credit score and encourage long term debt rather than short term. It is likely that you have maxed out your overdraft if you are going for payday loans.

    Secondly, the cost is there in black and white, just like any other loan. So cannot be criticised for being sneaky or underhand.

    Thirdly, "reputably" credit card companies and banks throw on huge fines for missing payments so why can't the payday companies? Admittedly they are more, but that is the nature of these short term loans.

    Finally, I'll mention my own experience of these loans. I used them a number of times about 8 years ago. This was before you could get them online, you had to go into an office and write them a cheque for the amount you wanted to borrow + the interest and date it for when you'd been paid. My credit was rubbish and my overdraft was maxed out. At the end of every month I was short. I would require anything from £10 to £100 for less than a week, usually only for a couple of days so that my bank would not charge me for going into an unauthorised overdraft. These loans allowed me to rebuild my credit by paying bills on time and not pissing off the bank.

    Like all financial products they have to be used properly. I believe these should be regulated stronger than other loan suppliers, but I don't agree that they should be abolished.

    Report on 24 June 2011  |  Love thisLove  0 loves
  • Kulukulu
    Love rating 4
    Kulukulu said

    I suspect that most of the people using these loans are not "poor" but are hopeless at money-management. If you 're living beyond your means there are only 2 ways out - earn more or spend less.

    Report on 26 October 2011  |  Love thisLove  0 loves

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