PayDay loans fleece middle earners
Sarah Coles
Aug 17th 2011 at 5:00AM
Filed under: Debt, Banking & Borrowing
There’s something about PayDay loans that makes people feel slightly queasy. It’s the killer combination of seeming to offer an easy and immediate solution to your problems, and the unbelievably massive interest rate lurking in the small print.
It would seem therefore that these loans are for people on low incomes who have exhausted all their options. However, new figures have revealed that these aren’t the only people falling victim.
High earners take loans
According to Instant Loans Direct, around 57% of the people using one leading PayDay loans company are earning between £25,000 and £50,000.
They are bringing in well in excess of the national average and should surely have the resources that mean they are never backed into the corner of a PayDay loan.
So what’s happening?
On the one hand, they are being priced out of high street loans. With an average interest rate of 12.49%, they are put off the idea of borrowing money formally on a long-term basis. As a result many have been busy over the last few years borrowing up to their overdraft and credit card limits in order to maintain their lifestyle during what they hoped would be a brief downturn.
They have reached a point where every month their salary simply brings their bank account back to zero, and meets the minimum credit card repayment. They may get by on their credit limits in any normal month, but when faced with big expenses like holidays, home or car repairs, they have nowhere else to go.
Giles Coutts of Instant Loans Direct says: “Many assume it’s only those on low incomes struggling to get cash from their bank and who resort to PayDay loans. But it’s actually the middle-earners whose budgets are being bust and who need the cash most desperately to cover them, usually for ten days until PayDay.”
Getting stung
These PayDay loans are structured to appear affordable. Customers typically borrow a few hundred pounds for less than a week in order to tide them over to the next salary payment. In return they pay what feels like a relatively small amount of cash, possibly around £75.
However, when you boil this down and work out the interest rate it’s easily 1,000% on many loans – making every other form of borrowing seem like an absolute bargain.
Instant Loans Direct is one player in this market. Coutts argues that his rates – of just under 500% – compare well against the 1,000% or more charged elsewhere.
What can you do about it?
However, while shopping around for a PayDay loan may be a very short term solution, next month you need to have started to tackle the underlying problem or you’ll be playing catch-up for the rest of your life.
The answer in many cases is the most frugal three months of your life. Cutting costs to the bone for this sort of period, spending less than £4 a day on food and drink, turning the heating off, staying in every night, walking everywhere possible and staying off the phone should make a dramatic difference to your spending. Likewise, trawling the market for the cheapest deals on utilities, phone and broadband will help. Meanwhile, car booting and eBay should help top up the bank balance and eat into your debts. At the end of the three months you should at least have a little wiggle-room.
This should mean you don’t need an extra couple of hundred quid at the end of the month, so you have an extra £75 to repay your debts at the start of the next month, and your vicious circle becomes a virtuous one.
Current account running on empty? Is a PayDay loan right for you?
Jessica Bown
May 17th 2011 at 10:00AM
Filed under: Budgeting & Planning, Banking & Borrowing, Bills
Recent figures show that three in 10 Britons are now so stretched financially that an extra outlay of just £100 a month would push them over the edge. And more than two in 10 would be unable to cope with any increase, no matter how small.
Given this worrying situation, it is unsurprising that lenders report increased interest in PayDay loans aimed at cash-strapped workers struggling to make it through to their next PayDay.
How do PayDay loans work?
The amounts on offer to PayDay loan borrowers usually range from £100 to £300, but can go up to £1,000.
The term of the loans is almost always set at 31 days, while the money can generally be in your account on the same day as your application – if it is accepted. Some PayDay loan providers even advertise the ability to get the cash to you within just one hour. You will need a regular income and a current account to qualify, though.
Are they a sensible way to borrow?
PayDay loans can be a good way to get you out of financial hot water in the short term.
However, the interest rates charged on loans of this type are much higher than those imposed by credit card companies and personal loan providers.The lowest interest rate for a £100 PayDay loan on price comparison website Moneysupermarket at the moment, for example, is a massive1286.2%.
The interest rates are set at that level because the loans are supposed to be repaid within a very short term. The amount you pay in interest is therefore limited by the 31-day term. With the deal from PayDay UK mentioned above, for example, you would repay £125 – on a loan of £100 – over a maximum of 31 days. Meanwhile, a £300 loan with the same company would cost £375, if repaid within the 31-day term.
For those really short towards the end of the month, that may therefore seem a reasonable price to pay – especially as they can get their hands on the money the very same day.
However, the problem is that borrowers who take out PayDay loans are often seriously strapped for cash. And if you fail to repay the full amount on the date agreed, the sky-high interest rates can cause the amount you pay to soar – leaving you with a huge bill that can quickly spiral out of control. Loans of this kind are therefore best treated as a last resort, especially if there is a chance that you will not be able to repay them within the specified term.
What are the alternatives?
The best way to avoid having to take out a PayDay loan is to build up a rainy day savings pot that you can dip into when times are tough. For this, you should use an easy-access savings account that will not penalise you or make you wait for withdrawals.
The best unlimited-access account of this kind on the market at the moment is Northern Rock’s E-Saver Issue 5 at 3.01%, including a 12-month 1.50% bonus. However, you will need £1,000 to open this account, so if you are starting from scratch the Santander eSaver Issue 3 account is a better bet as it can be opened with just £1. The rate is also very competitive at 3.00%, although it does include a mega 12-month bonus of 2.50%.
Otherwise, the only real alternatives to PayDay loans are to borrow via the overdraft facility on your current account, a credit card or a personal loan.
Both personal loan and credit card applications are likely to take much longer than PayDay loans to come through though, meaning you will have to wait for the cash.
PayDay loans: A quick route to financial ruin?
Jessica Bown
Nov 15th 2010 at 10:00AM
Filed under: Loans, Debt, Banking & Borrowing
PayDay loans, which are short-term loans aimed at financially challenged workers who are struggling to make it through to their next PayDay, have a bad reputation.
This is largely due to the high interest rates charged. The lowest interest rate quoted for a £100 PayDay loan on comparison website Moneysupermarket, for example, is a massive 1282.2%.
The interest rates are set at that level because the loans, which usually range from £100 to £300, are supposed to be repaid within a very short term.
With the deal from PayDay UK mentioned above, for example, you would repay £125 – on a loan of £100 – over a maximum of 31 days.
Meanwhile, a £300 loan with the same company would cost £375, if repaid within the 31-day term.
For those really short of money towards the end of the month, that may therefore seem a reasonable price to pay. However, the problem is that borrowers who take out PayDay loans are often seriously strapped for cash.
Failure to repay
And if they fail to repay the loan on the date agreed, the sky-high interest rates can cause the amount they have to pay to soar – leaving them with a huge bill that can quickly become out of their control.
Lenders offering loans of this kind are therefore often criticised in the press for preying on vulnerable consumers.
PayDay loan company speed-e-loans is keen to respond to these criticisms in a bid to improve the image of these short-term loans.
It claims that 70% of its loans are repaid on time, while the remaining 30% are repaid within a limited time – the company’s “roll-over” extension period – that prevents the debt accumulating beyond borrowers’ control.
Very few of its customers end up accruing interest over the long term as a result, the company says.
Research
Based on research carried out among its customers, speed-e-loans also argues that PayDay loans do not encourage people to buy what they don’t really need – another claim made by the media.
Its figures indicate that more than a third of the loans it finances are used to pay bills, while a further 27% are taken out to cover the cost of an emergency purchase.
Meanwhile, 20% are taken out by people who need the money for a special occasion of some kind, leaving just 17% that are paid out to borrowers who “just need cash”.
Gary Miller-Cheevers of speed-e-loans said: “We offer a faster and more accessible version of what normal people used to expect from their bank.
“If a customer borrows £250 for 3 weeks until PayDay an emergency from us, our fees are clear: £53.54 total including interest and fast transfer fee; and in most cases, the money is in your bank in an hour.
“Some think it’s good value, others don’t, but either way it is very transparent”.
Loans of this kind are still best treated as a last resort, though, especially if there is a chance that you will not be able to repay them within the specified term.
MPs demand interest cap on PayDay loans
Julia Kollewe
Jan 18th 2011 at 6:30AM
Filed under: Loans, Debt, Banking & Borrowing
The government has come under fresh pressure to cap the interest payable on “PayDay” loans, after a cross-party group of MPs, including David Miliband, signed a motion demanding action.
Short-term PayDay loans can charge more than 2,500% interest, but many poorer people take them out because they can’t borrow from mainstream lenders.
The home credit market has grown fourfold in the last two years as banks have tightened their lending criteria, making it harder for people with chequered credit histories to borrow money.
The House of Commons business committee is to discuss a motion tabled by a Labour and a Tory MP today which calls for a cap on credit interest rates and charges, and for a levy to be imposed on credit and debit card providers to fund debt advice services.
Stella Creasy, the Labour MP proposing the motion with the Conservatives’ Justin Tomlinson, told the Guardian that she had met one person in her north east London constituency with nine separate loans from the same short-term credit company.
She said: “People who are shut out of mainstream credit are sitting ducks for these companies. There are so few of them dominating the market that there’s no proper competition.”
Other countries, including Canada and parts of the US have capped repayments on loans. Creasy said: “One of the reasons these companies are expanding so fast here is that we’re one of the few unregulated markets left.”
While several debt charities support capping interest, the Finance & Leasing Association has warned that it could restrict credit and drive vulnerable people into the arms of illegal loan sharks.
But what do you think? Are PayDay loans the answer? Let us know in the comments.
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This post was written by admin on September 4, 2011
