Warning on payday loans with 10,000% APR
The payday loan is marketed as a short-term solution to financial emergencies. Aimed at those with poor credit ratings on low incomes who are unable to take out a personal loan, lenders can offer up to £1,000 to tide cash-strapped consumers over until their next pay cheque.Figures from this summer show that between August 2007 and July 2008, the number of payday loans made in the
UK increased by over 130%.
However, financial experts are urging Britons to be cautious about turning to such extreme measures in order to secure credit. Payday lenders like Payday UK demand that £125 be repaid for a £100 loan. This means that by charging £25 for every £100 borrowed, it is equivalent to paying back £937.50 for borrowing £750 – the maximum amount lent – giving it an APR of 1,355%.
Even more worryingly, the company Quickquid.co.uk charges an APR of 9,889.3%, but says it only applies to loans that are outstanding for a year. If for some reason someone cannot pay back the loan within 30 days (or by the time they receive their pay cheque) then additional charges are added on for each month that the money is owed.
Payday loan companies are springing up all over the internet, promising that "payday cash could be in your bank today." Telling consumers, "you can spend your payday cash on anything you wish, a new bike, dress, maybe a holiday, it’s totally up to you . . . it only takes 2 minutes to apply with no forms to sign."
The controversial loans are even advertised on large financial comparison sites like Moneyexpert.com. Chief executive of the site, Sean Gardner, stated: "Payday loans have their place, but people have to be very clear about what they are signing up for. There are rightly serious criticisms about the product and they should come with a health warning."
An investigation by Channel 4 also showed that these loans are issued without carrying out adequate checks on the borrower’s ability to repay. In some cases, substantial amounts have been lent out without any evidence of income being provided.
Payday loans have been condemned by many debt charities for targeting the vulnerable and exacerbating their financial troubles.
Commenting on the problem of people finding they need to reapply for credit each month in order to keep their heads above water, Damon Gibbons from Debt on our Doorstep said: "Payday lenders make absolutely no checks as to whether or not the reason why people are taking out a payday loan is because it's a one-off, or whether they're actually in big financial problems and are needing to roll over month after month."
Now that payday borrowing is receiving attention from MPs and debt experts, hopefully it shouldn’t be long before regulations are put in place to curb this dangerous trend.
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