BARBED HOOK OF INSTANT CREDIT
Two weeks ago I suggested how to borrow money cheaply – indeed for nothing – to pay for Christmas. This time I am warning you against the traps that lie in wait for people who borrow carelessly.
More and more people are using so-called payday loan companies. They lend small amounts – usually less than £1000 – over short periods – typically a month or less.
They are popular because they do few credit checks and get the money to you within a couple of hours. But that attractive bait hides a very sharp and unpleasant hook that can be very hard to wriggle off.
The fees are usually around £30 for every £100 borrowed or more. And if you convert that to an APR – annual percentage rate – it will be 1700% or more.
The firms say that the APR does not reflect the reality of short-term loans – 30/100 is after all just 30%. They also say that the fees are modest for what you get. But if a friend offered to lend you £100 to the end of the month and then asked for an extra £30 when you paid it back you might wonder what sort of friend they were.
In fact the APR is designed to help us compare offers like with each other. As its name implies, it assumes that the loan carries on for a year at the same rate and that interest is charged on the interest as well. That means that the shorter period you borrow over the bigger the APR.
Even if that fee seems OK to you, if you cannot pay the loan and the fee back on time then payday loan companies will typically impose a very hefty penalty. Some of them will then offer to lend you more to pay the total of loan plus interest plus penalty. That is the moment when what you thought was a modest fee escalates into a serious debt.
Even if a firm does encourage or allow customers to rollover the debt in this way there is nothing to stop their customers taking out a bigger loan with another firm to pay off the first. And so on.
So pay day loan companies are best avoided. Otherwise you risk giving a bigger present to the firm than you do to you loved ones.
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