Consumers who are finding it difficult to make ends meet until they get paid are applying in droves for payday loans to tide them over, with the number of people taking them out more than doubling since the credit crisis erupted last August.
The volume of payday loans
being taken out has risen by more than 130 per cent in 10 months, according to research carried out for The Times, leading to a boom in business for the lenders.
While a loan like this can provide someone with a stop-gap until their pay cheque arrives at the end of the month, the lenders charge exorbitant levels of interest, making them an expensive solution. The loan
is usually repaid within a few days, but this is still ample time to accrue a significant amount of interest.
Payday UK, for example charges £125 for each £100 borrowed, so if a person borrowed £500 they would have to repay £625. To be eligible for a payday loan, applicants must earn at least £750 per month. The typical APR (annual percentage rate) charged by Payday UK is 1,355 per cent – considerably more than the average credit card rate of 20 per cent, or the average bank overdraft rate of 18 per cent.
"Over the past year payday loans have become an issue in the UK, and the growth in people who have problems who have such a loan has been notable in the last six months." said Chris Tapp of charity Credit Action
Andy Clarke, retail director at ASDA supermarket, said that he has noticed a change in consumers' shopping patterns, and that "in the week before payday, shoppers are buying a higher proportion of value products."
They appeal to people who are struggling to pay the bills and put food on the table, but they could actually exacerbate their problems, leading to more debt and worsening peoples' credit status if they have trouble repaying the loans.
Vince Cable, Treasury spokesman for the Liberal Democrats has said that the growth in popularity of these loans "highlights the problems stemming from the credit crunch and unsustainable levels of personal debt in the UK."
While lenders in the mainstream loan business have been seeing a serious deterioration of the market since credit starting drying up last year, the payday loan market is thriving as it cashes in on the thirst of British consumers which have wracked up huge amounts of debt and have little savings on which to fall back on when times are hard.
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