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Expensive payday loans on rise

By Dominic Welling dominic.welling@consumerchoices.co.uk

1.2million people take out a payday loan each year despite 1000% interest charges.

The number of people who take out a “payday” loan has quadrupled over the last four years, according to the watchdog Consumer Focus.

It is estimated that a combined £1.2billion is borrowed in the form of payday loans each year, which provide money to see them through until payday.

Payday loans are short-term loans typically repaid on the customer's next payday often with a post-dated cheque or authorisation to make an automatic withdrawal from the customer's account.

The danger for consumers comes when they take out a loan and cannot repay it the next month. If they defer payments or take out repeat loans, charges can quickly balloon.

Marie Burton, financial services specialist at Consumer Focus, said: "With the credit crunch, demand for short term borrowing has significantly increased despite the eye-watering interest rates charged by some payday lenders.

Consumer Focus has warned people to beware of the significantly high interest rates and charges on these loans, which can reach APRs of between 1000% and 2000%.

Given their short term nature, charges typically range from £13-£18 interest for every £100 borrowed, but can be as high as £30 per £100 for some providers.

A typical payday loan could cost £20 for every £100 borrowed, meaning a £300 loan would cost £360 if it was repaid after one month. If the loan was deferred or rolled over for another six months it could cost as much as £660 to repay the loan in full.

Burton added: "These products are controversial, but we don't agree with calls for them to be banned.

“Outlawing payday loans could leave some borrowers vulnerable to illegal loan sharks. Instead we need sensible safeguards now to stop borrowers becoming dependent on this high cost credit and prevent even more stringent controls being needed in the future.

“We also need banks to provide alternative short-term credit to suit the needs of cash-strapped consumers."