Page last updated at 23:53 GMT, Friday, 10 October 2008 00:53 UK

Payday loan sales come under fire

By Penny Haslam
Donal MacIntyre, 5 live

A payslip
Payday loans are growing in popularity as High Street banks lend less

Online "payday" loan firms, who lend money against next month's salary, are using increasingly aggressive marketing techiques, say debt advisors.

Many offer 'loyalty' rates or pay those who recommend friends and relatives.

Charities believe such techniques risk further exploiting vulnerable people for whom the loans may not be suitable.

But the British Cheque Cashers Association (BCCA) defended the industry, stressing it receives very few complaints from borrowers.

Payday loans typically involve lenders advancing cash to a customer, usually for under a month, either against a post-dated cheque or the individual's bank details, so that come payday the company can automatically recoup the money.

The annual percentage rate (APR) on these increasingly popular loans can work out at more than 2000%, although given the size of the sums involved, the actual cash cost of the interest is small.

Rising living costs and the lack of willingness by High Street banks to lend in the current economic climate are thought to lie behind the rise in loan applications. Figures out earlier in the year suggest a 55% increase over a six month period.

Debt advisors believe borrowers are also now falling prey to questionable marketing techniques, brought over to the UK from the USA, where payday loan companies have been driven out of business in a number of states either by an outright ban, or by the imposition of annual interest rate caps.


Katie - not her real name - is a working Mum from Liverpool.

It is irresponsible to incentivise people who are already struggling
Chris Tapp, director, Credit Action
She told the Donal MacIntyre programme on BBC Radio 5 live 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.

"I just needed 100 to go out and buy nappies and food for my family.

"The payday loans company was saying come in, bring your evidence of who you are and where you live, your cheque book and your debit card, and we can give you the money there and then."

Katie quickly found herself in difficulty. 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 originally borrowed and is now struggling to pay back her debts.


All payday lenders hold a Consumer Credit Licence and must make the APR attached to their products clear.

They are very simple products that are designed to help people with a short term problem

Geoff Holland, BCCA

Companies which operate in this field are also supposed to make a proper assessment of the borrower's ability to pay, before advancing money, but often this can be as little as proof of income, ID and a bank guarantee card.

Geoff Holland, Chief Executive of the British Cheque Cashers Association, said they have very few complaints from people who actually have payday loans:

"They are very simple products that are designed to help people with a short term problem".

However, some borrowers using payday loans told the BBC they have become trapped, forced to roll their loan over to the next month because they are unable to pay. Some have resorted to taking out a new loan each month to pay off the previous one.


Sam - not her real name - from the North East of England took out an advance on her salary through an online payday company to help with rising living expenses.

The Donal MacIntyre programme is on Radio 5 Live on Sunday, 12 October at 1900 BST.

She intended it to be a one-off but six months later she has ended up taking out three or four more payday loans.

Sam was tempted when her loan company offered a discount for being a loyal customer - the more loans she took out, the better the rate:

"If you get a loan with them, say four or five loans with them, you'll go from a silver member, I think after the first 2 loans: that gives you 10% off.

"Then another four loans, then you get gold status. Then you'll get 15% off your next loan, so you're actually paying less interest back."

Last resort

The Donal MacIntyre programme identified more sites which reward customers for recruiting other borrowers.

One offered 40 in vouchers if a friend took out a loan. Another promised borrowers 100 in return for the names and email addresses of five people who might also need a pay day loan.

While the use of rewards and incentives to sell payday loans is not illegal, the money education charity Credit Action is very concerned about the practice.

"It is irresponsible to incentivise people who are already struggling," said director Chris Tapp.

"We would only ever want to see people using payday loans if they have a desperate, one off short-term need and there is absolutely no other option.

For these companies to be actively going out to try to solicit business from people who aren't looking for a loan, presents this sort of borrowing as an easy money option. It really isn't. It is a very high cost, last resort option."

The Donal MacIntyre programme will be broadcast on BBC Radio 5 live at 7pm on Sunday 12 October, 2008 or download the programme podcast.

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