Wahay or no way to payday loans?

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By Rachel Jones
Know Your Money Editor

Credit-crunched consumers who panicked about how they were going to fund the recent Christmas festivities may have been lured by the promise of quick and easy money provided by payday loans. But as the Guardian warned, people desperate for a quick cash-fix until their next wage slip came in could have found themselves faced with sky-high annual percentage rates (APR). According to the newspaper, Payday UK would charge £50 to borrow £200 for 19 days, which works out at 7,194 per cent APR.

But it appears that the continuing economic downturn is bringing this type of borrowing to the fore again. Cash-strapped consumers may feel that a payday loan could be just the ticket for filling in the gaps between one wage and the next.

Why do people turn to payday loans?

The recent Bank of England interest rate cut down to 1.5 per cent may be good news for many Britons who need to borrow their way through the recession. As the Guardian noted, the promise of no hassle or fuss for those getting their hands on a payday loan means that people are all too often willing to turn a blind eye to the high rates - and could assume that the debt will be cleared once they get paid. But director of Credit Action Chris Tapp told the resource that such borrowing often led to people digging themselves further into the red.

"It's likely someone who is struggling one month and takes out a payday loan will still be struggling the following month when they will have to repay the loan plus interest. They then need to take another loan, and so on," he warned.

Shadow housing minister Grant Shapps is concerned about the availability of these loans after a constituent showed him a leaflet offering doorstep loans with 184 per cent APR. He calls the fact that vulnerable households often have to pay such rates "obscene". Furthermore, it is a lack of competition in the home credit market that has led to this situation, he adds.

He decided to investigate and comments: "It wasn't long before I had uncovered payday loans of up to a staggering 10,000 per cent APR."

This, he states, is adding to the ever-growing mountain of personal debt in the UK.

So why do people not just avoid them?

A recent report by Credit Action has revealed the extent of the financial mess that many Britons have got themselves in. The average UK household debt, including mortgages, stands at £59,670. Over £250 million of interest is forked out by cash-strapped consumers on a daily basis, while one person every 4.8 minutes is declared bankrupt or insolvent. The report continues, adding that the average amount owed by UK adults, including mortgages, is £30,420. It could be easy to see why people who are deeply in the red feel that a payday loan provides the quick lifeline they need in the hope of pulling themselves out of the turbulent financial waters.

Creditors are cottoning on to the fact that many individuals may be feeling desperate. According to the Independent, Harvey & Thompson, the UK's largest listed pawnbrokers, offer payday advance loans against a backdrop of tightened lending by banks.

Speaking to the newspaper, Harvey & Thompson's chief executive John Nichols says: "It's the same model that has been going around for 3,000 years." He adds that other pawnbrokers are also likely to flourish during the continuing credit crunch.

Are there other ways to get help?

Joining a credit union is one plan of action which the Guardian suggests is a cheaper alternative to payday loans. These groups are where people with a common bond - such as working at the same place or living in the same area - join together to receive better borrowing deals.

Mark Lyonette, chief executive of the Association of British Credit Unions (ABCU), tells the resource: "We would recommend anyone that needs a small loan should first go to their bank or credit union to get a good deal rather than using doorstep lenders or payday loan companies."

People who want to find out more about credit unions should ring the ABCU on 0161 832 3694. Furthermore, debt helplines could be another step individuals wish to take. The Consumer Credit Counselling Service can be contacted on 0800 138 1111 while the telephone number of the National Debtline is 0808 808 4000.

Once cash-strapped Britons have a clearer idea of how to organise their finances, they may be able to research the best deals available for their circumstances. Such research could include comparing debt consolidation loans, which may merge financial responsibilities into one more manageable monthly payment.

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