Payday Loan Scams That Bite Back
The recent launch of a new app on the iPhone has raised concerns over what are known as payday loans. The new tool, which comes from loan specialist Wonga, allows consumers to have money paid into to their bank accounts within 15 minutes of applying.
The timing of the launch should reel in many desperate potential borrowers, who have failed to eke out their December salaries after the spending excesses of Christmas and the New Year.
Wonga stresses that credit and identity checks are strict but if the application can be checked and decided upon so quickly, as promised, can that really be the case? The company also says that if borrowers use the facility for short term emergencies, say £150 borrowed for a week, then repayments are very competitive at just £10.50 or 7%.
However, for the company to make money, which is their aim, they will be counting on some borrowers not repaying in time.Running short of cash is a problem for many, but January is that much longer than other months if you got paid a little early in December.
For some this could mean dipping into an overdraft. The trick here is to plan ahead and make sure you don’t end up making unauthorised withdrawals which will cost much more. For others, the lure of a loan will be strong. And this is where it’s possible to get into real hot water.
Payday loans are not new but they are being promoted and advertised more heavily and widely than ever before and the iPhone app launch is just another alternative to the many ways to borrow money at a possibly crippling level of interest. They claim to be short-term emergency loans for employed people who need to bridge a gap. But the reality can be expensive and potentially very high risk.
Here are 5 reasons to avoid payday loans
1. The cost.
The interest rates which apply to these loans may not be easy to spot initially. This is particularly true of websites – many that I looked at had no details on the home page and in some cases no rate displayed at all. The loan companies also say that because they are offering short-term lending, the annual percentage rate (APR) is ‘misleading’. This is simply not true.
APRs are the easiest way to compare the cost of loans. For instance, the cheapest loan I found online at Moneyfacts has an APR of 8.9%. Compare this with the cheapest payday loan I found at 260.2%. This means the payday option will cost you nearly 30 times more whether you’re borrowing for a week or a year – and remember that’s the cheapest price.
Usually, payday loan companies are happier to quote the interest in pounds and pence. For instance, if the company charges £29.98 per £100 and you borrow £100, your repayment amount would be £129.98. Of course it works out as 29.98% a month – still a long way off the 8.9% a year you can get at a bank.
Where APRs are quotes, they are almost always ‘typical’ rates which means only around two thirds of applicants will get this rate and the rest will probably be charged even more. See below for my list of the top 10 most expensive payday loans.
Payday loan companies also claim APR is not relevant to them because their loans are short-term and not annual. But customers say these firms will happily extend short-term loans repeatedly, allowing borrowers to repay the debt over many months rather than a couple of weeks. Of course the longer you take to repay the money, the more interest they will rake in. So although they are sold as a ‘quick fix’, once they have you on board, they are happy to let you get deeper into debt, typically extending the loan up to five times.
Many payday loan firms carry out little or no credit check before they lend. You may think it’s a good thing that you can borrow without having to prove you can afford it. But it’s irresponsible lending and won’t do you any favours. Ultimately, they don’t pay the price – you will when it takes months to repay a loan you should not have had.
We know that details of the cost of the loan may be tucked away in a leaflet or several pages into a website, but there is plenty of other information payday loan companies could give you which many choose not to.
For instance, they don’t confirm whether they have a UK consumer credit licence, where they are based or who to complain to if there is a problem. Many sites are run out of other countries.
US loans companies are currently very attracted to the UK market because their own government has capped the amount of interest they can charge to US borrowers. No such protection here, so they can – and do – charge whatever they like.
Some sites provide no contact details at all. You just enter your personal information and bank details and hope for the best. The best in this case is that they give you a loan and do not just rip off your ID or sell your information on to fraudsters.
Would you give this information to a stranger in the street? It’s no different if the site has no way for you to verify it or contact the company. One company with absolutely no contact info is ‘3monthpaydayloans’, which is run out of India but is marketing in the UK.
Information from individual websites, correct as at 5 January 2010.
The Office of Fair Trading is currently investigating payday loans as part of a wider review of responsible lending. In the meantime, if you need a loan desperately then make sure you try absolutely every cheaper avenue first.