Money mayday as Brits turn to payday loans
The rising cost of living combined with the recent run of expensive bank holidays has led to a 58 per cent increase in demand for payday loans through moneysupermarket.com, compared to the same period in April. The UK comparison site is warning consumers to make sure a payday loan is the most suitable product for their circumstances and understand the terms and conditions before applying; otherwise they may find themselves in financial difficulty.
Payday loans are a form of short-term borrowing aimed at struggling consumers who need to bridge the gap until their next pay day. The amounts offered to consumers by payday loan companies usually range from £100 to £300, but this amount can go up to £1,000 in some cases. If an application is successful, money can be transferred into the borrowers account on the same day, making them extremely attractive to those that need a quick cash injection.
Due to their short terms nature pay day loans carry extremely high interest rates, some as much as 2,000 per cent when converted to an annual percentage rate (APR). These rates vary enormously, but typically, customers borrowing £100 will have to pay back around £125 and the term of the loan is usually set at 31 days - a £300 loan is likely to cost them around £375.
Tim Moss, head of loans and debt at moneysupermarket.com said: "It's no surprise to see the demand for pay day loans rise so sharply in the current climate, and particularly around bank holiday periods when people have been spending more. These products act as a barometer, giving a unique insight into the state of the nation's finances, and as people continue to feel the pinch, we can expect to see the popularity of these products continue to increase.
"When you convert the interest rate of a pay day loan to an APR, the costs involved can appear exorbitant, however, because of their short-term nature expressing the rate as an APR can be misleading. For consumers who need money quickly, it can often be cheaper to borrow using a payday loan than exceeding their overdraft limit without authorisation from their provider.
"However, the use of payday loans comes with a huge caveat. There is a real danger that customers could fall into a spiral of debt where they have to take out a loan each month just to make ends meets. Borrowing £100 one month means paying back £125 the next and anyone struggling to stay out of the red could find that taking out a pay day loan ultimately makes the problem worse. Payday loans are not suitable for customers looking for longer term credit or unable to pay off the debt within a few days.
"The golden rule for consumers is not to borrow money unless it is absolutely necessary. Consumers feeling the pinch need to sit down, go through their finances and try to work out where they can reduce their outgoings before considering any kind of loan. If you are a regular user of a payday loan, then you should really look at your circumstances. If you are in a position where you rely on them regularly, then I would advise seeking debt advice from one of the free debt advice charities who can help bring your finances back on track."