MPs concerned by payday loans
This is one way to borrow you really want to avoid...
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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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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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!