Payday loans: the APR is sky-high, the pain is higher still

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Payday loans: the APR is sky-high, the pain is higher still

Don and Liz Hackett have had three loans with My Home Finance, a scheme launched in 2010 for people who normally have no option but to approach payday lenders. Photograph: Andrew Fox for the Observer

Don and Liz Hackett have had three loans with My Home Finance, a scheme launched in 2010 for people who normally have no option but to approach payday lenders. Photograph: Andrew Fox for the Observer

Retailers are reporting gloom and doom on the high streets of Britain, but there is still one sector that is expecting to do big business this Christmas: payday lenders.

Online lender Ferratum claims that more than 2 million people have already applied for payday loans, and Ian Porter, the company’s UK sales and marketing manager, says: “We are already seeing a significant increase in applications for our micro-loans and we still have weeks to go until Christmas Day.”

Payday loans – the lenders prefer to call them short-term or micro-loans (a term more commonly associated with tiny loans to women in developing countries to help them start home businesses) – are designed to tide borrowers over until their next pay cheque. The money is usually provided quickly: Wonga boasts it can decide in seconds whether to lend and pays cash into your account within 15 minutes of a loan being approved. They are designed to be paid back quickly, usually in a month or two.

Payday loans incur enormous rates of interest – Ferratum charges a typical APR of 3,113% while Wonga, the highest profile payday lender in the UK, charges 4,214%. Labour MP Stella Creasy, who has campaigned for tighter control of high cost lenders, describes such firms as the “legal loan shark payday loans Columbus Ohio industry”. But the lenders say APRs are an inappropriate measure, as they are distorted by the short length of the loans.

Charges mount up when the borrower is unable to repay the loan at the end of the month, or can repay but immediately needs to borrow the same amount again. The lenders all claim to select their clients carefully, choosing only those who are able to repay. Wonga says it uses thousands of pieces of data available online to check the suitability of its clients. Ferratum says it has received applications from people with many different occupations including solicitors, doctors and nurses.

But Itisam Akhtar, manager of My Home Finance in Birmingham, a low-cost alternative to payday and doorstep lenders established by the National Housing Federation, sees it differently. He says: “The majority of our clients are on benefits. We look at [potential customers’] bank statements, and we’ve seen many payments to payday lenders.”

Payday loans: the APR is sky-high, the pain is higher still

Citizens Advice says it has seen a fourfold increase in the number of people with payday loans coming to its bureau for help with debts. Gillian Guy, the charity’s chief executive, says: “On average, CAB clients with payday loans had eight debts, while those without payday loans had five. Our evidence suggests a pattern of people in long-term financial difficulty with other debts, who are much more likely to take out a payday loan to try and deal with these problems.”

Credit unions

In the past five years, credit unions have made about 500,000 loans to higher risk borrowers, 80% of whom are claiming benefits. Whereas Wonga charges about 1% a day, loans from some credit unions will cost no more than 1% a month – an APR of 12.7% – up to a maximum of 2% a month or 26.8% APR. This means someone borrowing ?500 for a year would pay a total of ? at the lower rate, and ? at the higher rate.

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