Until these so called 12 month payday loans surfaced we have always argued here that you cannot use APR to compare a payday loan with an unsecured loan or any other form of longer term credit for that matter because it is a totally unfair comparison. A payday loan is designed to be repaid within a time scale of weeks (sometimes days) while the unsecured bank loan is paid back in a time scale of years.
We make that very point when disputing MP Stella Creasy’s argument in the article ‘Payday Lenders Under Fire.’
Now a few companies have surfaced that are offering 12 month payday loans that argument could well become moot - strengthening the case for MP Creasy, MSP Margo MacDonald in Scotland and others trying to get payday loans made illegal or at least have their interest rates capped by so much that the model no longer works and they all go out of business.
Three such lenders that have emerged recently are 12 Month Loans, Pounds to Pocket and FlexiCredit. They all offer loans over a full year with APR at 278% and compared to the Post Office’s APR of 15% they clearly are nothing but extortionate rates of interest.
Borrow £2000 from the Post Office for 1 year and you would pay back £180 a month for a total interest charge of just £154.
Borrow the same £2000 using one of the 12 month payday loans mentioned above and your monthly repayments would be £317 for a total repayment of £3,800 – £1800 in interest charges.
A recent article in The Independent about these 12 month payday loans had this to say:
If you miss a payment with Pounds to Pocket you’ll be charged a penalty fee of £12. According to the website, “if you miss a certain amount of consecutive payments, we may accelerate the full balance of your obligations to us and the entire outstanding balance plus all accrued and unpaid interest that is owed will be declared due and payable”.
Una Farrell, a spokeswoman for the Consumer Credit Counselling Service, says this type of high-cost credit can lead to serious debt problems.
“Unfortunately, the economic downturn has seen a mushrooming of this type of loans as many families struggle to make ends meet,” she says, “Advertising on daytime television is a cynical way to market an expensive product towards those who aren’t working and likely to be short of cash. I would urge anyone considering taking out one of these loans to shop around for cheaper forms of credit.”
“With high street banks adopting a more cautious lending approach there will be more people tempted to borrow from these loan companies charging extortionate rates of interest,” says Andrew Hagger of Moneynet. “The problem for borrowers with minor credit issues is that there’s no half way house. If you can’t borrow from the bank at 18 to 20 per cent APR, then you are looking at having to pay over 270 per cent. There doesn’t seem to be anything in between. These lenders are taking advantage.”
Both Ms Farrell and Mr Hagger agree that financial exclusion is at the heart of the issue, where people feel unable to, or are unable to, seek credit from the mainstream banking system. “It is important that people open bank accounts and do what they can to improve their credit rating such as putting their name on the electoral register,” says Ms Farrell. “They shouldn’t be afraid of seeking credit from a bank just because they haven’t before.”
Although they are being called 12 month payday loans – a loan designed to see you through to your next pay cheque – they clearly aren’t, despite their efforts to appear very similar. They offer services found on payday lender web sites such as no paperwork applications and same day transfer of your money but don’t be tempted, you will pay back just under twice as much as you borrow, even on small loans.
On the Flexicredit website they quote 12 monthly repayments of £48.98 for a total return of £587.76 and that’s for a loan of just £300. Borrow £300 from Payday Kong and you would pay back £75 in interest if you had the loan for 30 days. Still expensive but far better than paying double.
These 12 month payday loans have played into the hands of those who argue there is no place for companies like Quick Quid, Speed e Loans and Payday Kong despite the fact they fill a need in the market and are used for the purpose they were intended by the majority of us.
Legitimate payday lenders like Quick Quid and the others need to distance themselves from these legal loan sharks as soon as possible because their enemies will soon be using these new 12 month payday loans being offered on the TV ads as examples of why all “payday lenders” should be banned.
If you need to borrow more than a few hundred pounds and for a longer period you should exhaust all other options including banks, pawnbrokers and logbook loans before applying for one of these so called 12 month payday loans.
Source: The Independent