Clare's consumer finance advice

Every week Clare Francis, financial journalist and editor of comparison site moneysupermarket.com will offer tips and advice on all things money-related to help iVillagers make the most of their hard-earned cash. From energy bills to car insurance; credit cards to children’s savings accounts; mortgages to discount vouchers Clare will show you how to make sure you’re getting the best deal

Thinking of taking out a payday loan? Read this first...

By Clare Francis on 07 Dec 2011 9 comments

You’ve probably seen adverts for payday loans from companies such as Wonga. They’re promoted as a quick way to get emergency cash - many firms advertise the fact decisions are instant and the money can be in your bank account that day.

With many people struggling to make ends meet it’s therefore not surprising that demand for payday loans is soaring. The number of people taking out a payday loan has quadrupled over the past four years according to Consumer Focus, a consumer watchdog.

This is also a peak time of year for people to take out a payday loan. Getting through January is often a financial struggle. If you haven’t been paid since before Christmas you may be desperate for payday to arrive and the ability to get your hands on some instant cash is likely to be tempting.

However, before you apply for a payday loan think very carefully about whether or not it really is the best option for you.

Payday loans receive a lot of bad press with many journalists taking the view that they are never worth taking out. I don’t share that opinion, but I do agree that for most people a payday loan isn’t the best solution if they’re short of cash.

How do payday loans work?

Payday loans are a short-term borrowing solution designed to bridge the gap if you run out of money towards the end of the month. The maximum you can borrow with a payday loan is around £400 (although this varies depending on the provider).

The idea is that you borrow some money and then pay it back on payday plus a bit extra. Most providers will charge you a set amount, depending on how much you initially borrow and as long as you repay the total amount within 31 days there’ll be no other charges.

For example, say you need £100 to see you through to the end of the month you’d pay back £125 in total if you took a loan from Payday UK.

Some, such as Wonga, use a daily charge. So if you borrow £100 and repay it after 10 days, you’d have to pay £115.91 back, but if you repay after 30 days, you’d have to repay a total of £136.72.

One of the reasons why payday loans get such bad press is that if you convert the borrowing cost into an annual rate of interest it’s scary. On its website, Wonga states that its charges are equivalent to an annual percentage rate of 4,314%!

But remember, payday loans aren’t designed for long term borrowing. In the same way that you wouldn’t get a taxi from Glasgow to London, you wouldn’t take out a payday loan for a year.

In some circumstances, a payday loan can actually be the cheapest way to borrow. For example, if you’ve got a bill to pay but don’t have enough in your current account to cover it, taking a payday loan may be cheaper than going overdrawn without permission, or exceeding your agreed overdraft limit - if you need money urgently, there isn’t always time to have an overdraft approved by your bank, or to get a new credit card.

So what’s all the fuss about?

Despite the fact that payday loans do have a place and may be the best option for some people, they come with a big, fat ‘danger’ sign.

Think about it, if you ‘sub’ yourself £200 this month, you’re already £200 down next month. So if you won’t have that money to spare, you’ll run out of cash again which may mean you take out another payday loan to repay the last one - you’ll effectively be robbing Peter to pay Paul.

Therefore, taking out a payday loan can suck some people into a spiral of debt, which they then struggle to get out of.

So, even if money if tight at the moment, think very carefully before applying for a payday loan as it may make things worse rather than better.

If it really is a one-off to tide you over until your next salary cheque then it’s worth comparing prices and going for the cheapest payday loan.

However, if the reason you need to borrow is because you are struggling to get by financially, it may be worth speaking to a debt adviser. Charities such as Citizen’s Advice or the Consumer Credit Counselling Service will be able to help.

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The Debt Collector (not verified) replied 23 weeks 6 days ago

Before we start: yes, I really am a debt collector although in the Commercial Sector not retail, but have been in the past. I have been on "face-to-face" visits to collect money from Consumer type finance debtors and not surprised that the debtor is in trouble; also question why they were granted that level of Credit in the first place. The classic example for me, was a girl referred by a friend who was receiving threatening letters, and was in the process of being evicted. When I saw the rent book, I could understand why she was being evicted; owing the Landlord 6 moths arrears. She came to live with me for a while and the former Landlord was forwarding mail. I noticed that she had very poor vocabularly and hardly add up. I calcualted that she had a reading age of about nine years old; and clearly no idea what she was doing. One morning a batch of letters arrived, one of which came from her bank. The worrying thing about that "letter" was that is was drafted in the form of a Petiion for Bankruptcy. Actually the document was illegal and a certain Griffin of a Bank was impersonating Court Documents. I warned them that this was illegal and incontempt of Court as well as breaching the Consumer Credit Act. The attitude of their representative was extremely high handed with me and because I was in casual clothes, assumed that I was an idiot. As I say, actually I am a certificated bailiff, and threatend to report the bank to the Ombudsman for wrongful trading; as well as Lord Justices Department for Contempt of Court. This sort of behaviour was EXACTLY the sort of thing that the Consumer Credit (CCA) and Hire Purchase Acts of 1974 and 1964 were designed to stop. The CCA actually had a rule which prohibited companies charging more than 50.1% APR for a loan. The reason why the likes of WONGA and Pay-day Loans have popped up is because there is a loop hole in the CCA in that the Statute only covers loans over £100 and more than six months duration. Since the lenders mentioned above work inside those perameters, the evade the law and therefore effectively can charge what they like. In the case of Cash Converters over 1000%; and in the case of Wonga and Pay-Day Loans anythin between 1750% and 2500% (no those are not typing errors, I am talking THOUSANDS Percentage). The law needs to be reviewed again, as these types of money shops are worse than the pawnbrokers of the eary 20th Centuary. Also, what a lot of people do not realise that in the small print many of these loans may be secured on your property, should default take place and Judgement in the County Court be entered. They can issue a warrant of Execution to seize goods to the value, as well as apply to have money deducted from your salary; but still charging 2250%APR. Thanks to the absurd Judgement earlier this year by the House of (Law)Lords, which in effect has allowed lenders to charge whatever level they like for loans means that the protection of the Act has been lost. There shoould be a Trading Standards Review of this matter under the control of the House of Commons, and as for the those who sat in the Law Lords when the decision was made, should be shot ! I understand people who get in to trouble through no fault of their own (losing their job, their company going bust etc), and those are the ilk which the CCA is designed to protect. Those who are/were "professional debtors" i.e. those who deliberately take out a loan with no intention of repaying it were caught in a safety net where the matter could be referred to Magistrates and made criminally Bankrupt as opposed to Civil,( I won't go in to the differences). These short term loan companies need to be controlled and the Statute changed so that any loan over £100 irrespective of length cannot charge more than 50.1% The argument that the loans are high risk,and therfore this is taken in to consideration when granting the line of Credit is total rubbish. It is little wonder that people are in such severe difficulties with lunatics lending like this and with absurd interest rates, and I would suggest that the Law Lords who passed the Judgement, should be investigated. Either they have a vested interest in the likes of Wonger and Cash-converters, or have never understood the law in the first place. The Loans should be cancelled, and the likes of Wonga and Payday Loans, as well as Cash Converters should be shut down. They bring the entire lending industry in to disripute and taken us back to Dickensian back-street bookies. Also the banks and credit card lenders need to be told that they have to keep their interest charges in line with Base Rate. As for their inevitiable response "we are lending against risk"; they have the option: lend to those who are capable; and if not viable: don't. It is no good crying in your beer when things go wrong. As Mr. McCawber states in Little Nell (C. Dickens) "The law is an Ass". And again, I speak as debt collector !

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Anonymous replied 1 year 17 weeks ago

Payday loans are dangerous - and very expensive. Because they are on the high street it can make them seem part of mainstream life but it's far better to take a look at all your outgoings and see where you can make cutbacks in order to finance the shortfall.

Eating really frugally for a week or a month or a year can be challenging and fun. Looking at all your direct debits and seeing which can go and which services can be renegotiated. You may only save a few ££s on each one but it all adds up. There is lots of good advice on http://zero-credit.co.uk

The Debt Collector (not verified) replied 14 weeks 20 hours ago

Anon: I think you have hit on another issue here, and that is the main High Street banks, who not as vociferous as the likes of Pay-day Loans and Wonga.com etc.; are being allowed to get away with obscene interest rates on overdrafts. Given that Base Rate is 0.5% I see no reason why the banks and Credit Cards need to charge 18.5% for a basic overdraft, as well as so called "Service Charges" when there is in fact no service given. The so called Government and Governing Bodies have done litte to control credit to the vulnerable borrower, and taken away almost all of the controls which were put in to place by the Consumer Credit Act to stop this sort of thing happening. People are desperate at the moment, and many not well educated mathematically, nor understand the mechanics of the banking system and are being ripped off. The Consumer Credit Act and The Consumer Protection Acts now have more holes in them than ethemal cheese and need serious review, particularly the way that interest is accrued and set. As I mentioned before these loan sharks are using a loop-hole in the Consumer Credit Act 1974, which only covers loans under £100 and less than six months contractual duration. To that end they fall outside the "Extortionate credit terms" provisions of The Act as well, causing yet further problems, allowing the less honest lenders like pay loans open to manipulate the vulnerable. We have actually stepped backwards 75 years to the back-street lenders who were banging on peoples' doors in the middle of the night to collect debts, and the dodgy Loan Companies that were repossing cars and other goods in the 1960's at 00:01 am becuase techincally the last installment had not been paid. The 1964 Hire Purchase Act 1964 (still incorporated under schedule IV of the Consumer Credit Act 1974) stopped this with the so called "Third and Half" rules restraining the ability of lenders to reposesses without a Court Order. However, thanks to the Judgement last year in the House of Law Lords, the intended protection of the Consumer Credit Act 1974 (Extortionate Credit Terms provisions) have been swept away. The whole issues of lending need to be reviewed including both Conusmer Credit and the Banking Acts to bring back the morality to lending. With interest rates for savers, trying to put money aside to but a large asset such as a car or even a washing machine, makes it impossible for people to save for things. Yes certain agreements can be re-negotiated, but ususally at a significant price, including security taken on your home, and often at an even worse interest rates. In some cases making an offer of payment will result in some (honest) lenders stop interest and allow you to pay of debt on a small installment say £5-10 per month, subject to review usually in six monthe hence. In the long run it is cheaper for both, although if you are dealing with a dodgy charachter, always ensure that they have issued the correct notices under s.75 of the Consumer Credit Act, when you receive the Court Papers make an offer of payment and only admit part of the debt which you feel is genuinely due; if you are unsure, Defend in full. If you do not have experience in these things, see a Solicitor under (what was) the Green Form Scheme, now known as Solicitors advice line. It is not just a telephone contact but there are High Street Solicitors who are part of the scheme for free legal advice. Regrettably the Citizens Advice Bureau, who used to be very useful with Consumer Credit matters have lost their edge considerably and you are better off going to speak to the Debt Advice Line, who can also provide you with a name(s) of local Solicitors who can provide free information or help for about half to an hour. Before you go, make sure that you have a list of what you want to do and take the papers which you have already received. That will cut down the time pushing paper around and allowing you more time to seek remedies.