Beware offers of easy credit
Your finances are in a mess and you desperately need to pay an important bill fast.
You search online and are bombarded with easy money offers: "Payday loans in one hour", "Cash on demand", "Instant cash advances", the websites shout. An end to your money worries seems only a few mouse clicks away – and that's when the trouble starts.
Succumbing to the lure of easy money you can apply for online in just a few minutes can lead to debt misery that lasts years.
Yet thousands more people have been resorting to this type of high-cost borrowing in the wake of a severe recession and credit crunch that has denied them access to mainstream lenders.
Payday loan misery
The UK payday loan and short-term credit market now accounts for over £7.5 billion of loans to cash-strapped borrowers, says the Office of Fair Trading (OFT), and the sector is estimated to be making £16,000 in profit every hour.
Meanwhile, research by watchdog Consumer Focus in August this year found that around 1.2 million adults took out payday loans last year.
Typically, online payday loan lenders charge £25 to £35 per £100 borrowed per month, but door-to-door lenders can charge a lot more – over £80 per £100 in some extreme cases, once late-payment and rollover costs are added. These seemingly innocuous figures can translate into horrendously high annual percentage rates (APRs) of up to 3,000%.
For example, one leading payday loan operator, Payday UK – a trading name of Milton Keynes-registered MEM Consumer Finance – quotes a typical APR of 1,737% and charges £25 per £100 borrowed for loans up to £750.
Unlike other unsecured loans, which are paid off in monthly instalments, payday loans have to be paid off all in one go – the next time you get paid.
According to MEM, this is typically 20 days after making the application. So if you borrowed £500 to pay an emergency bill, Payday UK would expect you to repay £625 – a £125 charge for just 20 days of borrowing.
Gavin Hayes, general secretary of Compass, the left-leaning think tank spearheading the End Legal Loan Sharking campaign (endlegalloansharks.org.uk), which calls for a cap on lending rates, says: "During the credit crunch we've seen APRs rising because of a lack of competition in the market."
Some lenders have also been particularly unscrupulous in the way they lend. Take Welcome Finance (part of the Cattles Group that collapsed in February 2009 with debts of £2.4 billion), for example.
Writing about his experiences working for Welcome, one former employee commented on the End Legal Loan Sharking website: "Most shamefully, it seemed that no thought was given to our most vulnerable clients.
"The worst case that I came across at Welcome was a woman who had been sold nine separate loans – her forwarding address was the mental health wing of a hospital."
Lenders usually take your debit card details as part of the application process so they can take out the full repayment come payday. They'll do this whether you have the money in your account or not, potentially pushing you into overdraft and triggering bank charges if you don't.
If you can't repay the full amount you can ask to defer the loan, but they'll usually insist you at least pay the borrowing charges.
There may also be a deferral fee or a charge incurred for arranging the new loan. So it's not hard to see how cash-strapped borrowers can quickly become submerged in debt.
A step into the unknown
The growth in payday lending and short-term credit has been driven in part by the internet, but the difficulty is you often don't know who you're dealing with.
Borrowers may think they're applying through a lender website when in fact they are using a credit broker acting as an affiliate.
This type of firm will merely pass on your application to a bank of lenders and will not be the one making the decision to advance you a loan. Some charge an upfront brokerage fee for this 'service', even if a loan offer isn't forthcoming.
For example, Wentworth Direct Finance, based in Gravesend, Kent, supposedly offers loans of between £1,000 and £15,000 at a typical APR of 15.2%. Nowhere on the website does it indicate that a £59 broker's fee will be levied, irrespective of whether a loan offer is made.
After filling in an online application forms unwitting customers find that the charge is taken from their accounts without their knowledge.
The resulting loan would often be for a lower amount and at a much higher APR – up to 90% in some cases. Disgruntled customers trying to get refunds of their brokerage fees have often been thwarted by an unresponsive Wentworth 'customer service' team.
Moneywise did some sleuthing into Wentworth Direct Finance. The only company of that name listed with Companies House is described as a 'non-trading' company whose accounts are 'dormant'. The consumer credit licence number quoted on its website expired in May 2010, according to the OFT's public register.
A spokesperson for the OFT says: "We're currently deciding whether or not to renew this licence", but wouldn't elaborate on whether this review was in response to complaints from customers.
However, because of the OFT's delay in completing the review, the company licence is still valid.
The man behind this operation is Anthony Grant Clayton. Another of his trading names is Capital First Loans UK, which is the company many Wentworth 'customers' are subsequently contacted by after filling in the application form.
If it feels like a scam and looks like a scam, it probably is a scam. We tried talking to Clayton and sent an email to the only personal email address we could find. We got an 'inbox full' message by return.
We tried ringing the telephone number quoted on the website. The receptionist said she'd put us through to him but then the line went dead. Subsequent calls went unanswered.
No wonder the Financial Ombudsman Service reported a 110% increase in complaints about consumer credit for the year to 31 March 2010, on top of a three-fold increase the year before. Complaints about credit broking in particular rose fourfold.
While there is growing concern about the high-cost credit market, there is little consensus on what to do about it. In its review of the high-cost credit sector, published in June 2010, the OFT surprisingly concluded that "these markets work reasonably well".
It argues that capping interest rates or banning this type of borrowing could push people into the arms of illegal loan sharks – a view shared by Consumer Focus and the Consumer Credit Counselling Service.
It seems short-term borrowers will have to continue fighting for themselves.
Payday loans open the window for fraudsters
Few borrowers take the time to read a broker's terms and conditions in their rush to get at the cash, or even check that the 'broker' has a consumer credit licence issued by the OFT. But failure to do so can have serious consequences.
In other words, you could have given your personal data, including your national insurance and debit card number, to practically anyone around the world. At best, this means being bombarded with offers of instant cash from a plethora of other 'lenders'. At worst, it means opening yourself up to outright fraud.
When Moneywise investigated some of these affiliate credit broker websites, we found that many of the subsequent emails actually originated from a US company called BMA Group, based in Henderson, Nevada.
Suffice to say that US companies are unregulated by the UK Financial Services Authority or the OFT and so their British customers are not protected by any of the consumer protection laws.
An overdraft is an agreement with your bank that authorises you to withdraw more funds from your account than you have deposited in it. Many banks charge for this privilege either as a fixed fee or charge interest on the money overdrawn at a special high rate. Some banks charge a fee and interest. And other banks offer a free overdraft but impose very high charges for exceeding the agreed limit of your overdraft.
Short-term cash loans designed to be borrowed mid-way through the month to tide the borrower over until they next get paid, whereupon the loan is settled. Generally used by people with bad credit ratings and/or no access to short-term credit such as an overdraft or credit card. Like logbook loans, this type of borrowing is hugely expensive: the average APR on payday loans is well over 1,000% and in some instances can be considerably more.
A scheme originally established in 1944 to provide protection against sickness and unemployment as well as helping fund the National Health Service (NHS) and state benefits. NI contributions are compulsory and based on a person’s earnings above a certain threshold. There are several classes of NI, but which one an individual pays depends on whether they are employed, self-employed, unemployed or an employer. Payment of Class 1 contributions by employees gives them entitlement to the basic state pension, the additional state pension, jobseeker’s allowance, employment and support allowance, maternity allowance and bereavement benefits. From April 2016, to qualify for the full state pension, individuals will need 35 years’ of NI contributions.
If you’ve have a complaint about a financial service product you have bought but the company you bought it from refuses to resolve your problem after eight weeks, the Ombudsman can help. The Ombudsman will investigate and resolve the matter. The Ombudsman is independent and its service is free to consumers. The Ombudsman may find in the company’s favour but consumers don’t have accept its decision and are always free to go to court instead. But if they do accept an Ombudsman’s decision, it is binding both on them and on the business.
Issued by a bank as part of a current account and, in a nutshell, serves as electronic cash. Unlike a credit or charge card, where you get an interest-free period before you have to settle the bill, the funds spent on a debit card are withdrawn immediately from your current account. Unless you’ve arranged an overdraft, if you don’t have the cash in the account, you can’t spend it.
This is used to compare interest rates for borrowing. It is the total (or “gross”) interest you’ll pay over the life of a loan, including charges and fees. For credit cards where interest is charged at more frequent intervals, the APR includes a “compounding” effect (paying interest on interest). So for a credit card charging 2% interest a month (equating to 24% a year), the APR would actually be 26.82%.