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Millions turn to Payday Loans

By December 7, 2011 No Comments

R3 insolvency group says millions turn to payday loans

Millions of Britons are likely to take out a high-interest loan in the next six months to last them until payday, a group of insolvency experts claims.

Borrowers can face interest rates of several hundred per cent.

R3, which represents “professionals working with financially troubled individuals and businesses”, bases its claim on interviews with 2,000 people.

Some 60% of them were worried about their level of debt, and 45% struggled to make their money last till payday.

R3 says the survey reveals money worries at the highest level it has ever recorded.

Payday loans are small, short-term unsecured loans designed to tide people over until they get their salary.

The survey found 45% of those questioned struggled to make it to pay day, rising to 62% for 24-44 year olds.

One in six are so-called “zombie debtors,” who are only able to service the interest on their debts.

The payday loan companies are now a £2bn-a-year business, says BBC correspondent Andrew Hosken.

Escalate

If the money is paid back promptly on the next pay day, this type of lending can be cheaper than paying an unauthorised overdraft or a credit card charge.

However, if the loans – some charging interest rates of more than 4,000% – are rolled over, debts can quickly escalate.

One woman told the BBC she borrowed £300 and now owes £720.

“You usually get a fee for arranging it, then you get the interest, then you get the capital you’ve borrowed,” she said.

“In some cases, to transfer it instantly they charge you £15 which they take straight away from the money you’re borrowing.”

‘Racking it up’

She adds: “A lot of them know because you’re going to be in a bad position on the next month, so they’ll offer to pay just the interest the first month and roll it over to the second month. So you’re just paying interest on the first repayment then on the second month you’re paying interest and capital.

“You can get into a cycle where you’re just paying off these little amounts thinking it’s manageable, not realising you’re racking it up.”

Last month it was reported that the number of people running into debt through payday loans has quadrupled in two years.

It is too easy to obtain such credit and the CAB is calling for tighter regulation.

But Consumer Minister Ed Davey said tougher measures could push people into the hands of illegal loan sharks.