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Loans: The Pitfalls of Payday Borrowing

History shows us that in times of recession, when money is tight and people become desperate to keep a roof over their heads, loan companies thrive. So it is no surprise that all over our TV screens and newspapers are adverts for countless high-interest short-term payday loans. A quick browse on the internet revealed over 20 of these companies offering quick and fast loans. They profess how simple and easy it is to borrow a few hundred quid to cover an emergency. To quote one company, "So whether it's the car that's just conked out, an urgent bill has landed or you've just remembered your wedding anniversary with hours to spare... Don't worry, Wonga it!" Worry? Every one of these companies charges incredibly high interest rates, typically an APR of 1750% and in some cases closer to 5000%. On top of this they often have hidden charges such as arrangement and transfer fees, which they add to the initial amount borrowed. So let's put some numbers to this using one of the wellknown lenders, Wonga: You borrow £300 for 30 days at their APR of 4214%. This will cost you £95.89 in fees and interest, so the total you have to repay is £395.89. To borrow the same from a high street bank using an authorised overdraft or loan would cost in the region of a fiver. Craig first borrowed £100 from online loan company Wonga and 19 days later paid back £125, including fees and interest. "The first time it looks like a good deal, but the next month I ran out of money even more quickly," he said. "I ended up borrowing again, until it got to the point where I was using other loan sites just to pay Wonga back." Ten months later that £100 loan had ballooned into a £7,500 debt with six different lenders. Which, the consumer group, says it has uncovered 'widespread' poor practice in the sector, including potential breaches of the Consumer Credit Act, poor privacy provisions and inflated interest rates. Of the firms reported to the Office of Fair Trading, appeared to be operating without a valid Consumer Credit Licence, while failed to display the APR for its loans anywhere on its website. Borrowing £100 at Wonga's APR costs more than the US national debt (over $14 trillion) after seven years. If you could get a long-term loan at this rate, and it compounded over a longer period, here's what would happen: Borrow £100 and make no repayments: After 1 year: Owe £4,200 After 2 years: Owe £180,000 After 3 years: Owe £7 million After 4 years: Owe £315 million After 5 years: Owe £13 billion After 6 years: Owe £557 billion After 7 years: Owe £23.5 trillion The problem with, and the attraction of, these companies is that the people they are preying on are those who can't get short-term loans through normal banks or credit card companies. Either they have a poor credit history, they are being excluded by high street banks or they are already in severe debt. The government has talked of capping the APR of these companies, as is the case in Germany and France, but as yet they've failed to act on this. Housing charity Shelter's research indicates that a million people took out one of these loans to keep a roof over their head in 2011 and called the findings "shocking". How long can these businesses, often described as legalised loan sharks, be allowed to make huge profits on the back of poor and desperate people? If you are in a situation like this, don't keep going back and feeding the sharks. Ask for help from your nearest Citizens Advice Bureau or think about joining a local credit union. Citizens Advice Bureaus : 416-418 London Road (0114 258 3322) 28-30 Spital Hill (0114 275 5376) Michael Carlisle Centre Osbourne Road (0114 271 8025) )

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