Debt -
Rise of High Rate Payday Loans in the UK - 21/04/2008
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A phenomenon which started in the United States so called payday loans are fast becoming popular here in the UK as a way of getting cash fast. Payday loans are very short term loans which can be approved and paid within a matter of hours.
The loans are designed to be leant over a period of one month and repaid at the end of the month when the customer receives their monthly paycheque. Small short term loans of no more than £750, they are advertised as the potential answer to temporary money worries, offering a fast cash injection to tide you over until payday.
The loans have been criticised for their shockingly high rates and the ease with which you can obtain one. The pre-requisites to qualify for a payday loan are simply to be over eighteen and in full time employment. No credit checks take place and there is no discrimination on the basis of your status or income.
What alarms financial experts as well as the ease in obtaining one of these loans is the high rates. Typically for each £100 borrowed, you pay back £125. That means that on a maximum loan of £750, you would pay back £937.50. The annual percentage rate (APR) for many of these companies is a massive 1,355.
However, APR is perhaps a misleading measure for these loans as they are not intended to be paid back over a period as long as a year. The charges are high when paying it back on time, but if you do take as long as a year to repay the loan, the costs can be devastating.
An additional £25 charge is added to each £100 borrowed in addition to the £25 standard interest for each month that your payment is late. A £100 loan can escalate to £400 in 6 months and almost £1,400 over a year.
Many of these companies target young people advertising on social networking sites popular with young people, such as Facebook. In defence of the loans, a spokesman for the company behind Payday UK says that “bouncing cheques or incurring unauthorised overdraft fees, can work out considerably more expensive to the customer than the equivalent charges on a payday loan”, suggesting that payday loans can be the cheaper option for those struggling with the bills.
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