By Kevin Peachey
Personal finance reporter, BBC News
Offers of payday loans have become more obvious
Everywhere you go in the UK during the downturn, you never seem to be too far away from an advert for a payday loan.
In Middlesbrough, offers for quick and easy access to cash are found in the window of a converted church. In London, competing loan shops can be found on opposite sides of the street.
Payday loans are offers of relatively small amounts on credit to "tide you over to the next wage packet". The industry says its typical customer earns £18,000 a year.
Competition in the area has mushroomed in 2009, according to an interim report by the Office of Fair Trading (OFT) into the £35bn high-cost credit market.
But the reasons for this are not just because consumers need the cash - it is because the lenders are short of access to funds too.
Matter of timing
The "success" story of payday loans is a tale of the credit crunch and the recession.
The global banking crisis suddenly turned off the tap of wholesale funding for banks and for specialist lenders.
With availability and access to wholesale funding having dried up, specialist lenders moved away from offering large loans and are now offering smaller, shorter-term loans.
It has also affected which customers they want to lend money to.
So the number of providers of payday loans, that offer less than £1,000 for a short period of time, has risen sharply.
"Such lenders are less dependent on wholesale funding, due to the smaller loan size and the quicker returns available on small-sum, short-term loans," the OFT report on high-cost consumer credit says.
John Lamidey, of the Consumer Finance Association trade body, says that the increased competition has come from existing lenders or pawnbrokers moving into the payday market together with brokers and introducers, rather than a herd of new entrants.
Regulations, introduced at the start of 2005, allowed lenders to offer these loans online. These internet offers still have room to grow, he says.
Attracting consumers to payday loans has prompted widespread debate.
APR stands for the Annual Percentage Rate of charge. You can use it to compare different credit and loan offers
A lender must tell you the APR before an agreement is signed but it does not include all costs, such as charges for late or missed payments
If a credit union loan costs no more than 1% a month on the reducing balance of the loan - an APR of 12.7% - then borrowing £1,000 over one year would mean repaying no more than £1,067 in total
Adverts tend to feature witheringly attractive people with a big smile, announcing how easy it is to borrow these relatively small sums. Some offer loyalty rates or pay those who recommend friends and relatives.
Mr Lamidey says that some providers on the fringes might push the boundaries, but the mainstream payday lenders are in for the long haul and so carry out credit checks and act responsibly.
One major chain is charging £9.99 for a £90.01 loan that is all repaid within 30 days. The APR on this deal is typically 260.2%.
The OFT report says that some consumers do not understand how an APR works, with many people finding it more useful to be told how much they have to repay in total rather than the APR.
The review also explains that quick access to money was the primary reason why people choose particular credit offers, even though they know that this is an expensive way to borrow money.
In fact, up to a third of users of certain high-cost credit products say they will continue to use them even if interest rates are raised so their monthly repayments are a third higher.
"I am concerned that so many people are relying on these forms of high-cost credit," says Consumer Minister Kevin Brennan.
"That is why we have provided almost £100m to support community-based lenders such as credit unions and we have also improved the advice and support available to people in debt through the free national debt helpline."
The recession has squeezed some people's spending power
According to the Association of British Credit Unions, a typical loan of £200 for one month from a Manchester credit union would cost £4, at an APR of 26.8%.
But - even if they might be cheaper - the OFT's report reveals that the government's promotion of credit unions is not working.
"Credit unions have not achieved a significant presence in the UK," the OFT report says.
In England, the membership rate stands at 0.9% of the population. In Wales, membership stands at 1.8% and in Scotland it is 5.6%.
These figures are low compared with consumers in Canada, Ireland and the US, the report shows.
The big risk with payday loans - as with other forms of credit - is getting into a spiral of debt because the funds are not available to repay the advance, especially at Christmas time.
One young mother told the Donal MacIntyre programme on BBC Radio 5 live last year that she took out a payday loan from a shop on her high street after her wages fell, following a period of sick leave from work.
She did not have enough in her bank account when the payday loan company cashed her post-dated cheques.
As a result, she ended up paying more in bank charges than the amount she had originally borrowed and struggled to pay back her debts.
Many fully licensed loan shops are owned by American companies, and many have opened in the UK after some state authorities capped the rates they could charge in the US. No such caps exist in the UK.
In June 2010, new European regulations are likely to make cross-border lending easier.
So, for at least as long as the credit squeeze continues, they look as though they are here to stay.