The claim
“If you borrow that money from your bank on an unauthorised overdraft typically they will charge you £5 a day so after 30 days you’re going to have to pay back £200 and after another 30 days you’re going to have to pay back £400 – that is hugely more than any payday lender is offering. We are actually offering people a cheaper alternative to the problems they’ve got right now.”
John Lamidey, chief executive of the Consumer Finance Association, Radio 4 Today programme, 7 December 2011
Cathy Newman checks it out
As wages are cut in real terms and the cost of living soars, Britons are turning to payday loans who hand out instant cash for often exorbitant rates of interest. The number of people taking out these so-called ‘payday’ loans quadrupled between 2008 and 2010, to 1.2 million.
And today, a report by the insolvency group R3, suggested that figure could rise to 3.5 million British adults over the next six months. Today, the industry attempted to fight back, claiming that payday lenders were actually offering better interest rates than you’d get from many banks. Sounds too good to be true. Is it?
The analysis
If you desperately needed to borrow £100, what would be the cheapest way of going about it – short of asking your friends or family?
Credit card
What about just whacking it on a credit card? Withdrawing £100 in cash on an M&S credit card, with an APR of 23.9 per cent, you’d be charged just £1.80 interest a month.
Overdraft
Alternatively, there’s the bank. Say for example, you had a Halifax bank account and you went £100 into the red, the interest would cost you £30 a month.
But if you go over my overdraft limit without agreeing it with the bank first, you’d have to pay £125 a month. Much more expensive than a credit card.
Payday loan
So could it be cheaper to get a payday loan? If you went along to paydayloan.co.uk, borrowing £100 from them would cost me £25 a month in interest.
Is that it?
Not so fast, says Moneysupermarket – Mr Lamidey isn’t comparing like with like.
A payday loan is an authorised loan – it is not the same as an unauthorised overdraft with your bank – which is basically taking the bank’s money without its permission.
A payday loan is also a last resort – Moneysupermarket explained that while an unauthorised overdraft could theoretically see your bank charge you almost £2,000 over 12 months, it is highly unlikely that a bank would let that happen.
A payday loan however is far more likely to let you roll it over – in which case a loan of £300 on the average payday APR of 1,730 per cent would end up costing you £5,590 over a year when all’s said and done.
Worringly, research by Friends Provident shows that almost a third of payday loan borrowers rollover and do so an average of two times.
Sarah Brooks, Director of Financial Services at Consumer Focus, said: “These are hard times and in the run up to Christmas, many will be tempted by a payday loan despite APRs of over 1,000%. Considering this is now a billion pound industry, regulation in this area is not strong enough and much more needs to be done to prevent consumers getting caught in spiralling debt. Today’s survey highlights large numbers of consumers who only ever pay off interest without touching the capital borrowed – this is a very alarming situation.”
Payday loans should not be used to fund a holiday for example, or as one loan group has advertised – for a girl’s night out. Moneysupermarket advised anyone taking out a payday loan more than twice to consider a personal bank loan instead.
A spokesman for the price comparison site told FactCheck: “We believe there’s a place in the market for payday loans – there are far worse options, like loan sharks. But they shouldn’t be taken lightly – people should try and borrow from their friends and family first. A payday loan should be very much a last resort.”
The problem is payday loan groups make it so easy for people – even sending text messages offering to put money in your bank account within 15 minutes.
The industry, which is fairly new, is not currently regulated by the Financial Services Authority (FSA). Is it however, facing the scrutiny of the Office for Fair Trading, which has considered installing ‘price controls’ or caps on borrowing, but rejected the idea on the grounds that it might “further reduce supply” to borrowers that are not catered for by mainstream suppliers. A move which some warn could force people into the arms of loan sharks.
Cathy Newman’s verdict
So if you’re convinced you could repay a payday loan within a month that would work out cheaper than many bank overdraft fees. But it’s much more expensive than putting the money on a credit card.
And today’s survey found that one in three people who took out a payday loan couldn’t pay it off at the end of a month, and that’s when it starts getting very expensive. If you just pay the £25 interest on a £100 loan, in four months you’ve racked up as much in interest as the amount you originally borrowed..
The analysis by Emma Thelwell
