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Payday loans: Quick fix or big risk?

Chiara Cavaglieri 20th Nov 2010 3 Comments

Reading Time: 7 minutes

Payday loans may be a tempting way to get instant cash and quick credit but with sky high interest rates and extortionate charging structures we show you how dangerous they can be, and take a look at the alternatives.

What are payday loans?

Payday loans are small loans (under £1,000) taken out for a short period with the funding guaranteed by your next pay cheque. Most payday loans last for a maximum of 31 days, although some are just seven days long.

Getting a payday loan is very easy. For example, with Txtloan you typically need to provide only a few basic details, including your bank account details to apply. They simply require you to register once and then you can just send a text message and you’ll receive instant cash into your bank account.

The only stipulations with these guys are that you are a UK resident, at least 18 years of age, employed and earning at least £400 per month and you must have a valid bank account, mobile phone and an email address. However, they will generally not lend to anyone who has had a CCJ or been made bankrupt in the past 18 months.

A growing market

The payday loan industry has really taken off since the credit crunch. A report by Consumer Focus revealed that the number of people taking out payday loans has quadrupled to 1.2 million in the past four years.

The popularity of payday loans is understandable – the problem with the unsecured loan market is that providers are now really, really picky about who they will lend to. Anyone with blemishes on their credit rating may well be excluded from mainstream lenders, meaning that some people have nobody but the payday loans companies to turn to.

The problem is that these loans have extortionate rates and it’s far too easy to build up a terrible debt burden if you can’t pay it off immediately. Even if you can pay off the loan quickly, it still costs a shocking amount in interest.

How much do they cost?

At face value, some payday loans may seem like an attractive deal.

At Txtloan, for example, you pay £17 interest  on a £100 loan, paid back after 15 days. This is actually cheaper than some unauthorised overdraft bank account charges. However, working out to a mammoth 4474% APR plus a £1 handling fee per text (see here), this deal doesn’t look so good.

Thames Financial Payday Loans offer payday loans from £50 to £750. They act as a broker, searching a number of providers on your behalf.  Therefore the terms and conditions you get from Thames Financial will vary because of the variety of lenders they deal with. Whatever deal they come up with, always check the small print – especially the APR rate, as it will likely be pretty high.

Quidtilpayday offers quick loans from £80 to £750. As with Thames Financial, the typical APR varies – be sure to check it!

Paydayfinder offers quick loans from £80 to £750. On a £100 loan you’d repay £125, with the typical APR being a huge 1770%.

At Wonga.com the typical APR is an eye-watering 4,214% APR. There is a £5.50 transmission fee to pay but the total cost depends on how long you want the loan for. For example, if you wanted £100 over 7 days you would have to repay £112.78, but if you wanted to pay it over 31 days you would have to repay £137.76.

Misleading APRs

It’s true that these APRs (Annual Percentage Rates) are perhaps misleadingly high because they are used to calculate interest over 12 months – which is admittedly not very helpful when payday loan periods are no more than 31 days. You can see here for Wonga’s explanation as to why payday loan APRs are so high.

However, APRs still serve as a reminder that using payday loans compared to say a credit card is potentially a very expensive way to borrow money, and if you’re relying on them they could actually leave you with an even bigger debt problem than when you started.

The other problem with payday loans is that the full amount is repaid all in one go that may place you in a similar position the following month. If therefore you find that you are unable to pay back the payday loan, that’s when the big charges start racking up…

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What happens if I can’t repay the loan?

If you can’t repay the loan, you’ll quickly find yourself in big trouble. This is where the claws come out and the payday loan companies start making their money.

At Txtloan if they are unable to take money from your account after 15 days you will be instantly hit with a barrage of charges:

  • Day 17: They send the first overdue reminder including a £25 administrative fee and a daily interest fee of £1.13, the loan now totals £143.13
  • Day 27: Second overdue reminder including a £25 administration and interest rate, loan now totals £179.47
  • Day 45: The loan totals £199.87
  • Day 46: They refer the loan to a debt collection agency which incurs an additional £47 administrative charge and transaction fee. The loan totals £247, plus you may have to pay additional charges to that agency.

Even worse, throughout this period Txtloan will keep trying to take the money from your bank account so if the funds still aren’t there you could also be facing charges from your bank every time the transaction bounces, which is normally around £20 – £40 a go.

At Wonga.com the first missed payment fee is £20, then a further £17.50 if they can’t collect the payment by 5pm that same day and the matter is immediately passed over to a collection firm. The one good thing, however, is that you won’t be repeatedly hit with ongoing charges until you pay back (unlike the others) but you will still pay interest on your balance for up to 60 days.

There are some real horror stories about people using payday loans, being unable to repay on time and ending up in a real mess – there are some posts here about CashGenie which make for sombre reading.

Why you should steer clear

The problem with any short term loan or payday loan is that you aren’t really solving the real problem – if you’re struggling to pay your bills each month and your pay cheque isn’t covering all your outgoings, payday loans will only make matters worse in the long run.

If you are determined to take out a payday loan you must ONLY do this to cover an emergency and ONLY when you are sure that you can pay it back within the agreed term. With such high APR’s and extensive charges for late payment, using a payday loan could easily see your debt spiralling out of control so they really should be a last resort.

Alternatives to payday loans

Now that we’ve (hopefully!) put you off the idea of a payday loan take a look at some alternative ways to borrow money:

A 0% credit card: Use a 0% credit card for interest-free spending if you have a good enough credit record to get a 0% deal (check your record here before applying) . As long as you clear the balance within the introductory period it is essentially an interest-free loan. The Tesco Clubcard credit card (typical 18.9% APR) offers the longest 0% period for purchases at 16 months. Other best buys include the Sainsbury’s Credit Card at 0% for the first 15 months on balance transfers and six months for purchases along with the Virgin 12/12 card which offers 12 months at 0% for purchases and balance transfers.

A bank account overdraft: If your credit rating is good, you can also borrow cheaply on an agreed overdraft with your bank account. The Santander Preferred Overdraft Rate account, for example,offers a massive 12 month 0% overdraft as long as you switch over all your direct debits and pay in £1,000 per month.

Social lending: Beat the banks by ignoring them altogether and borrowing money from your peers instead! Zopa was the first online financial marketplace which brings together individual borrowers and lenders. As a Zopa member you’re credit checked and placed into a ‘risk category’ with the most creditworthy applicants getting access to the best rates. Get all the details on becoming a Zopa borrower here. Also, find out about other social lending sites like Yes-Secure here.

Credit unions: These are our favourite options. Credit unions lie somewhere between a bank and a co-operative. The idea behind a credit union is kind of similar to Zopa in that the credit union is mutually beneficial for both borrowers and savers. Members save their money with the union for a decent, reliable return and that money is lent out to other members at an affordable rate. So lenders get a good rate of interest on their money and borrowers don’t have to pay through the roof for a loan.

You do need to be an established member of a credit union and have already set up a savings account before you can get a loan so find one near you on the FindYourCreditUnion website. Seriously, credit unions are a fantastic option for anyone but particularly if you’re struggling. Go and find your local one now.

Online pawnbrokers: A pawnbroker  is rarely a good first option if you need to raise cash but they’re generally better than payday loans companies. With a host of online pawnbrokers such as 62days.com cropping up which offer lower interest rates and no penalties for early repayment, this may be worth considering for a quick fix. Pawnbrokers work by lending you a percentage of the value of a particular item (often jewellery) for a specific period, during which the loan accrues interest and once the term is up you can repay the loan, plus interest and get your item back. The loan is secured against the item you hand over so if you don’t repay the loan, they keep that item. 62days offers an even better deal because it will let you sell an item to them, albeit for less than you could get for it in say a jewellers or eBay, but then you have the option of buying it back within 62 days for exactly the same price.

Get more info in our article here.

Getting started

  • Whenever you’re applying for finance it’s helpful to check your credit rating first. To get hold of a copy of your record go to one of the credit reference agencies – you can get a 30 day free subscription to Creditexpertto see where any problems lie and to correct any mistakes. If your rating is bad, there are several ways you can improve it which will help you to access better interest rates and deals.
  • If you often find yourself in debt, we have some tips on getting your bank account back into the black here.
  • If you’re really struggling to make ends meet, take the time to make sure you’re claiming all the benefits you’re entitled to – you can do this in a matter of minutes with Turn2us.org. You can also talk to one of the free debt charities to get some help with budgeting. See NationaldebtlineCitizensadvice and Consumer Credit Counselling Service.


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9 years ago

there are simple rules: if you want money and you are sure that you can repay on term, then is ok. if you late, then the problems are coming..

Floyd mayweather
Floyd mayweather
9 years ago

i like money

12 years ago

All these options apart from the pawn broker are for people with good credit, and most credit unions want you to save for 3 months before taking a loan out with them – the point of a payday loan is that it is money needed in an emergency i.e now not in 3 months time, and they may have poor credit so would be refused elsewhere.

Jasmine Birtles

Your money-making expert. Financial journalist, TV and radio personality.

Jasmine Birtles

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