Fear of credit card fees drives growth in payday loans

18 August 2010, 16:28   By Julia Kukiewicz

THE number of payday loans being taken out in the UK has quadrupled in the past four years, according to research from Consumer Focus.

payday loans
Credit: Sam72/Shutterstock.com

Amongst the reasons given by those taking out the short-term, high-interest loans for choosing them over other forms of borrowing was a fear of unexpected credit card charges or being tempted into more long-term debt.

Those who had taken out a payday loan also said that they were quicker to get hold of and easier to understand than other forms of short-term borrowing such as credit cards.

Hair-raising APRs

Payday loans have been criticised for their hair-raising APRs: usually between 1,000 and 2,000%.

Since the loans are meant to be paid back within weeks this is more often expressed by lenders in terms of a fixed amount - typically £13-18 for every £100 borrowed.

However, as highlighted above, that's not necessarily more than offered by a mainstream bank through an unauthorised overdraft facility and has the advantage of having a recognisable end date.

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However, the problems come when the loans aren't paid back quickly and payday lenders often seem unwilling to speed up the process.

Consumer Focus estimate that a typical payday loan of £300 could cost £60 in interest if paid back in a month.

Left for six months, though, the interest due would be more than double the amount borrowed: £360.

Consumer Focus estimates that the average payday loan borrower takes out 3.5 loans a year, increasing the chances of this happening.

On the other hand, payday loan holders tend to be young and single which makes it correspondingly less likely that they'll have a lot of other financial commitments to tip them into trouble.

Over half are aged under 35 and 60% aren't married or cohabiting.

An estimated two thirds of those borrowing using payday loans have a household income of less than £25,000.

Tighter controls

Consumer Focus advocate tighter controls on payday loans rather than banning them outright.

"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," said Marie Burton, financial services specialist at the group.

"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."

In practice Consumer Focus is calling for limits on the number of payday loans that can be taken out by any one household within a set period as well as limits on the number of times any one household can 'roll over' their loan and just pay off the monthly interest, letting the debt continue to mount up.

To ensure that households don't simply go out and borrow from a number of payday lenders the consumer group is advocating effective data sharing between companies in order to identify, and help, those most at risk.

Again, the idea is to offer real and responsible lending alternatives rather than just stop short-term, accessible lending altogether.

For more on how Government and consumer groups advocate changing the payday market see our full guide to the problems and solutions of payday loans, available here.

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