Payday loans: don't forget the small print

17 December 2009

Sitting on the tube last week, I noticed an advertisement for payday loans from Big bold red letters proclaimed “Cash in a flash” and “up to £500 a day!”, next to photos of a happy young chappy beaming away no doubt at the promise of ready cash.  The advert went on to give two guarantees: one, that Moneyshop “don’t tie you down” and two that they “do tie you over till next payday.”

The cheery assurances continued with “we’re right up your street”, followed by a list of places in London where would–be customers can make contact if they don’t want to apply online. The apparent ease with which cash–strapped punters can get their hands on some extra dosh is coupled with the ethos that payday loans are, like credit cards, an everyday, universal form of borrowing.

The premise of payday loans is that workers caught short towards the end of a month can borrow a certain amount of money and pay it back within 31 days, safe in the knowledge that their next pay cheque will cover the costs. By August 2008, applications had more than tripled in a year, reflecting the hard times so many of us faced.

The steep incline is finally descending from its menacing high, indicating that applications are finally slowing down. It’s no wonder then that to counter this slump, Moneyshop’s adverts appear just in time for the spending bonanza that is Christmas. Whereas you might not have given the advert a second glance beforehand, it would probably appeal more post festive shopping trip or expensive night out.

What really annoyed me about the advert is that while it happily displayed its potential £500 payouts, there was no mention of charges or interest rates. What I didn’t realise is that by displaying minimal information Moneyshop keeps in line with the Consumer Credit Act’s stipulations on credit advertisements.

Although in most cases any loans have to display typical APR, this depends on what information the advertisements display. Moneyshop’s poster doesn’t show any repayment details; nor incentives such as a special rate or free gift; or boast that its products are ‘best buy’ or the ‘lowest rates’ and only displays the credit, (without any promise of it being available to people who struggle to get credit elsewhere).

It’s only when you go onto the website that you get some more detail.  The homepage  boasts that unauthorised bank charges cost you more than a payday loan. A £99.01 loan costs you only £9.99 at the moment – that’s 10% interest right? Wrong. The typical APR on this is 260.2%. Failing to pay back the loan within the short time frame would cost you considerably.

Living on credit is dangerous enough with credit cards and overdrafts and I can’t help but feel that these adverts and the approach they are taking is trying to normalise payday loans. OK I’m sure there are one–off instances where payday loans could come in useful: funding someone’s birthday party or booking the family holiday but I can’t ever agree that they should be regarded as a standard form of borrowing.

My other point is that once you start borrowing money to cover the back end of the month, how do you stop yourself from doing the same again, the month after? To quote a well–known advertising slogan: “Once you pop you can’t stop’. Pringles weren’t lying when they extolled the virtues of their salty snacks but at least you have no choice but to stop once you’ve munched your way to the end of the packet. Instead of budgeting your money and working out where to make cutbacks you rely on these loans to tide you over.

Even if you pay back the loan in full every month, based on Moneyshop’s £9.99 offer, you’d spend £119.88 in a year just to borrow money. Sticking to a budget is oh–so–tiresome but a savvy budgeter could no doubt find a few better uses for an extra £120 quid.