Payday loans: Worrying trend?

Many people struggle to make their pay last the month

Running short of cash towards the end of the month is a reality for thousands of people.

Now a new breed of financial provider is setting up, offering a solution in the form of money until your next pay day.

By Louise Greenwood
BBC Radio 4's Money Box

Called "payday lending", the new product has arrived from the States where it has been estimated that more than 10 million people have used the service.

Put simply, if you need some cash, you give the payday loan company a post dated cheque and it gives you some money.

The techniques are very clever, it is designed to catch people almost unawares Ahmed Butt, Mary Ward Legal Centre

When your salary turns up, it simply cashes that cheque, clearing the loan.

Payday lending has been available on the high street for some time but now it is spreading to the internet too.

BBC Radio 4's Money Box found one website, called "Month End Money" offering loans of between £80 to £500.

The site offers an easy service of a lump sum to help pay for "unexpected bills" or "a big night out before payday".

But the service is not cheap. To borrow £100 you must write Month End Money a cheque for £125. That is an interest rate of 25% for a bridging loan you may only hold for a day.

Ahmed Butt, debt adviser at London's Mary Ward Legal Centre believes young, naive customers are particularly vulnerable to this kind of website.

"The techniques are very clever. It is designed to catch people almost unawares. If people are thinking they do need that £100 for the weekend then it seems so easy, too easy in fact, but the hidden issue is: how much it is costing them at the end?"

Rollover debts

The basic idea is that you pay the loan back straight away but there is particular concern about websites that actively encourage their customers to put off repaying.

One of them is simply called "The Payday Loans Company".

There seems to be a preying on the view that people should be able to get hold of credit when they need it. Damon Gibbons, Leicester City Council

With one click of the mouse on its website you can roll the loan over for another month.

Damon Gibbons, head of advice services at Leicester City Council says this means the charges will automatically double.

"Before long you are getting to the point where you have paid as much in interest and charges as you have in terms of the actual loan amount.

"There seems to be a preying on the view that people should be able to get hold of credit when they need it.

"If people are getting into difficulties with their finances, one of the ways in which they are being encouraged to deal with that is simply to borrow more from very high charge lenders such as payday lenders".

Money Box asked both Month End Money and the Payday Loans Company for an interview, but both refused.

The Payday loans company told the programme their charges are based on the need to make a profit in a higher risk lending market, and that borrowing from them can be cheaper than incurring bank charges for going overdrawn.

These two companies are part of a growing breed.

Voluntary code

The organisation that covers companies which make a living from cashing cheques, the British Cheque Cashers Association, has recently written a Code of Practice which forbids members from rolling over loans.

Why wait for a disaster to happen? If you have seen what has happened overseas, you need to bring the regulation to cover these companies now Ahmed Butt, Mary Ward Legal Centre

Geoffrey Cooke is Chief Executive. He told the programme any member found guilty of this practice would be struck off their register.

But the code is entirely voluntary and firms like the ones Money Box found have not signed up to it.

The Office of Fair Trading, which licenses firms who lend money, told Money Box it will consider any evidence of unfair practices among payday lenders.

But debt adviser Ahmed Butt wants more immediate action. He says payday lending in the US has dragged thousands of people into financial difficulty, and it could easily happen here.

He said: " Why wait for a disaster to happen? If you have seen what has happened overseas, you need to bring the regulation to cover these companies now."

Meanwhile, if you frequently find yourself short of money at the end of the month, the advice is always to speak to your bank first.

BBC Radio 4's Money Box was broadcast on Saturday, 13 September, 2003 at 1204 BST.