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Poorest families carry £82m loan shark debts

Households pay for Christmas with 825% APR loans
Managing finances

Over 100,000 of Britain’s poorest families will spend 2010 crippled by loan shark debts of around £82m, a new report has found.

The study, commissioned by affordable housing firm Circle Anglia and produced by the Financial Inclusion Centre think tank, found Christmas 2009 was ‘the worst in a generation’ for this type of lending. An estimated £29m worth of illegal doorstep loans were taken out over the holiday season, it claims.

On average, people borrowed nearly £300 from loan sharks at interest rates of 825% APR, meaning each individual will have to pay back more than £800. However, the interest rates charged on some illegal loans were found to be even higher, with some debts costing as much as 1500% APR.

Loan sharks moving in on UK consumers

The Financial Inclusion Centre report also suggests the scale of illegal loan shark activity is increasing in the UK. The use of loan sharks has risen by 22% over the past three years, and more than 200,000 households per year are now believed to borrow from them.

The study also says the situation has worsened during the recession, with Christmas 2009 sparking a boom in illegal lending.

Loans from doorstep lenders taken out during the festive period may account for half of the money borrowed from loan sharks throughout the year, the report states.

Payday loans and logbook loans

The use of legal high-APR loans such as payday loans and logbook loans is also of concern to financial experts, including those at Which?. Payday loans are designed for short-term borrowing, but tend to come with expensive fees which equate to very high APRs.

Wonga, a UK-based payday loans firm, has today launched an iPhone application. It allows users to borrow up to £1,000 via their mobile and can trigger the deposit of cash into a borrower’s account within 15 minutes.

The typical APR on a Wonga loan is 2689%. However, the firm claims this is not an appropriate way to measure the cost of borrowing from it, as Wonga loans are not designed for long-term use.

Logbook loans require borrowers to hand over ownership of their car to their lender ‘temporarily’, and also come with very high APRs. If an individual defaults on their logbook loan debt, it is possible they may not get their vehicle back.

Help with debts

Which? debt expert Martyn Saville commented: ‘These new figures are shocking. With high street credit still tight, many hard-pressed consumers are turning to disreputable alternatives just to make ends meet.

‘If you need to borrow money and can’t access mainstream credit, your local credit union may be able to help. Credit unions are fully regulated by the Financial Services Authority and offer much better value than both loan sharks and their legal alternatives – such as logbook loans and payday loans.

‘If you’re struggling with unmanageable debt, it’s imperative to seek free, independent advice as soon as possible. The Consumer Credit Counselling Service, National Debtline and your local Citizens Advice all offer free debt help.’

For more information on credit unions, read the free Which? guide to your loan options. To find your local credit union, visit the Association of British Credit Unions website. 

If you’re struggling with your finances, read the Which? guide to dealing with debt. Which? and Which? Money members can also get free expert help on the telephone by calling the Which? Money Helpline. See your latest magazine for details.

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