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‘Quick and easy' pay day loans could become more tempting

8th December 2008 Print
As the credit crunch brings consumers to their knees this Christmas, the lure of ‘quick and easy' pay day loans could become more tempting now than ever before.

New research from price comparison and switching service reveals that a consumer borrowing £750 from a pay day loan company could end up paying back up to £1687.50 if they defer repayments for a total of five months. With some APRs reaching 9889.3%, this type of loan could be one of the most expensive available in the UK today. Unfortunately, for many people this might be their only option.

Pay day loans can provide consumers with quick and easy cash, and, if used correctly, serve as one of the few forms of small loans available for terms as short as 7-30 days. Most organisations ask for applicants to be over 18 years old, prove they are employed, have their salary paid into a bank account and own a debit card. Loans are normally offered from as little as £50 up to as much as £1,000 - new customers are often limited to smaller amounts. Some providers stipulate a minimum income as low as just £333 after tax each month which equates to £3,996 per year. This is about a third of the minimum wage at £11,918 which could explain why providers allow people to defer repayments by up to five times, at which point the debt could be passed onto another lender.

Providers charge consumers up to £30 for every £100 they borrow over 31 days. This charge equates to 2,255% APR as the term of the loan is relatively short. As with all loans, the lender will incur many of the same costs regardless of the loan amount - this could go some way to explain why these costs appear disproportionately high for loans as small as £50. However, on a loan of just £500, the consumer would have to pay back £149.90 in interest over 31 days which equates to £4.84 per day.

Louise Bond, personal finance manager at comments: "Both the APR and the amount of interest charged by pay day loan providers is extortionate however you cut it. As with all loans, the problems occur when people cannot meet the monthly repayments and, in some cases, end up taking a second loan from another provider to repay the debt. Some companies will allow consumers to defer repayment for several months which, although it's better than selling the debt onto a third party, it can rack up a phenomenal amount of interest.

"These loans really are quick-fix solutions which only work for some people - for others they act as a fast track to a tangled web of debt. The current economic climate is perfect for these organisations to lure in unsuspecting cash strapped consumers that are often so desperate, they really don't care how much interest they have to pay. The application process is ‘loose' to say the least and, for some, credit checks are not carried out. Consumers should treat these loans with caution as they may seem like a solution. For many people, they will not make the bigger debt problems go away and they really need to seek professional advice."

For consumers who cannot pay the debt off in the agreed one month period, many will be sold onto another lender. Pay day loans are designed to offer consumers a small amount of money over a short period of time. People that have a long standing debt problem should really look towards a debt management organisation for financial help.

For consumers that have no other choice than to use a pay day loan, the following things should be considered:

1. Make sure you budget carefully so you can pay back the loan within the agreed term so you don't have to extend.

2. Pay day loans really are designed to be repaid in one month. Deferring repayments is really expensive and defeats the object of taking out a short term loan.

3. Do not assume a pay day loan is the only option available, if you are really strapped for cash you should speak to your bank to find an alternative solution first.

4. Overdrafts, loans, credit cards and many other cheaper forms of borrowing are still available - you really should exhaust all other avenues first.

5. If you do decide to take a pay day loan there are different deals available. Charges range from £25 per £100 borrowed right up to almost £30.