Payday loan APRs in the thousandsShort term loan rates hit poorest hardest

27 February 2011

Managing finances

Payday loan firms are charging interest of more than 4,000%. This means customers of the widely advertised short-term loan providers could enter into a spiralling debt situation.

Short-term credit agreements can leave customers needing to repay enormous sums to firms. For some, a better option may be to take out an unsecured loan. Payday loan companies such as Wonga advertise loans with interest rates as high as 4,214%, and many others will charge upwards of 1,700% interest. For a customer borrowing £300 for 28 days at 4,214%, this could mean a repayment of nearly £390.

Late payment is also an issue, with firms imposing a penalty charge of £20, typically. 

According to Nigel Cates, deputy director of consumer credit at the Office of Fair Trading (OFT), several online 'lenders' are operating without the required Consumer Credit license. He told Which?: 'Many payday loan firms are unlicensed and are a cause of significant problems, which is why the OFT is taking action to crack down on the sector.' 

Which? credit expert Martyn Saville said: 'We think charging £90 for borrowing £300 over a month is outrageous. These firms too often cash in on the desperation of the financially excluded, many of whom would be better off borrowing from a credit union or seeking free advice from a debt agency.'

Which? is calling for the government to investigate the credit market. See the Which? online guides for more on credit unions, free debt advice and what to do if you can't pay back a payday loan.

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