Over a million people are taking out pay day loans each year to cover costs for a short term period despite being charged a huge annual interest rate by lenders.
Customers taking out a loan of £100 for a week could pay as much as £120 back – an interest rate of 1,000 per cent.
According to figures revealed by watchdog Consumer Focus, some companies charge a whopping annual interest rate of over 2,500 per cent. However, the quick-fix nature of the facility has meant that four times as many people have taken up the service since 1996 and some customers, who pay back their loan the next day, could find it cheaper than using an unauthorised overdraft option.
John Lamidy from the Consumer Finance Association (CFA) explained the appeal of pay day loans: “There is a reluctance among many consumers to take on long term loans from traditional lenders, because they feel their financial situation could change. But they find that the short term credit offered by the pay day loans industry does meet their needs”.
Many customers use the loan service to cover living costs until they receive their next salary, at which point they can pay off the initial borrowed sum with interest.
Sarah Brooks, head of financial services at Consumer Focus, said: “Payday loans are a valid form of credit and it’s much better for people to take one out rather than go to a loan shark. But we do think there needs to be a limit on the number of loans people take out and how many loans they are able to roll over”.
The ‘roll over’ phenomenon occurs when consumers need to take out another short term loan to pay off an existing one, creating a spiralling mound of debt.
The CFA said it will be working with Consumer Focus to assess how serious the problems identified by the research are and exactly how many people they affect.