Payday loan APRs in the thousands amid increased debt recovery fears

Payday loan firms are charging headline grabbing interest rates of more than 4,000% APR meaning that tens of thousands of customers of the widely advertised short-term loan providers could be spiralling into a bad debt situation.

Payday loans are coming under more and more scrutiny as consumer watchdogs and action groups seek to inform consumers beyond the headline grabbing ‘money within the hour’ claims and seek to promote the darker side of what some have called, “legalised loan sharks” amid increased concern that such loans, ‘exploit the vulnerable’ and can result in an increased risk to bad debt, and being at the mercy of debt collection agents.

Despite the Office of Fair Trading (OFT) review last year which found that, ‘consumers tend to focus on how quickly and easily they can access credit and the affordability of the repayments rather than the total cost compared to other products’ it has so far rejected price controls for payday loans.

Whilst the speed at which the funds can be accessed is impressive, so to are the rates of interest and costs should repayment become difficult.

Payday loan companies such as Wonga (who sponsors Premier League football club Blackpool) advertise loans with interest rates as high as 4,214%, and many other firms such as PayDayUK, Provident and QuickQuid will charge upwards of 1,700% interest. For a customer borrowing as little as £300 for 28 days at 4,214%, this could mean a repayment of nearly £390.

Late payments are also an issue with payday loan firms typically imposing penalty charges of £20, whilst still charging interest.

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,  ’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.’

This, at a time when interest rates are at an all time low is significant when factoring in a comment from The Department for Business, Innovation and Skills, which said a lot of concern had been expressed about interest rates on credit and store cards during a public consultation in May of last year. It said, “The cost of borrowing on credit and store cards has risen markedly in recent years, despite falls in the base rate of interest,”

If you think 29% APR is bad enough, 4000% plus must be of some considerable concern? Yet one study found that more than 1.2 million Britons each year tide themselves over with temporary payday loans.

The big question is whether the increase in the use of payday loans will lead to an increase in bad debt, more debt recovery activities engaged by the payday loan firms and ultimately, more IVA’s and bankrupcies as typically, payday loans are seen as the last line of defence for consumer debt and it’s only a very fine line from this to much worse in that its all too easy for things to spiral out of hand and become the straw that broke the camel’s back.

CCDR is a leading, Liverpool based, commercial debt recovery firm offering services from outsrouced credit control to businesses, debtor tracing and debt recovery to debt mediation and business credit reports so we are not in any position to advice consumers on payday loans and this blog is merely reflecting many media references to such high interest borrowings and considering the question about there being a correlation between such borrowing and debt difficulties?

As with any agreement, be it a loan, a business contract or a payday loan it is always good practice to read the fine print and assess the full impact of the agreement as in the case of borrowing, the circumstances surrounding non payment can be dire.

For consumers reading this, the following link to the CCCS website provides more detail on payday loans.

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