Helen Nugent

Short-term lending isn’t black and white: make sure you read the small-print

Short-term lending isn't black and white: make sure you read the small-print
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As a Newcastle United fan, it was a bleak day when the Magpies announced a sponsorship deal with payday lender, Wonga. A company that charges extortionate levels of interest emblazoned across the chests of the players? Really?

Thankfully, the NUFC/Wonga partnership is drawing to a close, much to the relief of legions of black and white fans, and presumably to Wonga too given last year's slide in profits not to mention the millions paid out in compensation to customers, including to those in arrears who received letters from fake law firms.

But, initially at least, it was no wonder that Wonga could afford a £24 million four-year shirt sponsorship deal. The payday loan provider typically charges a representative APR in excess of of 1,500 per cent. That's not a typo.

As if that wasn't enough, last autumn Wonga admitted that it had double-charged thousands of customers for their loans, leaving some unable to pay their bills on the final day of the month. Given payday lender customers are more likely to be those on low incomes who have been frozen out by high street banks, spare cash is the last thing they'd have.

Of course, Wonga isn't the only payday lender to charge excessive interest, it just happens to be the one which sponsored my favourite football team. And it's also the UK's largest firm of this kind.

I'll concede that some payday lenders, including Wonga, have improved lending practices and customer affordability tests. But much of this has been forced on them by new rules laid down by the City regulator, including price caps and risk warnings. And, if you're looking for some short-term credit, payday loan companies are not your only option.

For many people, slipping into overdraft territory is preferable to a personal loan with a hefty interest rate. But there's some bad news here, too. New research from Which? has found that charges for an unauthorised overdraft could cost £156 more than for a payday loan.

The consumer group compared the cost of borrowing £100 for 30 days and found that unauthorised overdraft charges at some high street banks were as much as 7.5 times higher than the maximum that can be charged on a payday loan. That means that as little as £100 could end up costing £180 at one high street bank thanks to the fact that bank overdraft charges apply to the monthly billing period, not the number of days the money is borrowed for. The £180 arises if they borrow across two billing periods, compared to the £24 city watchdog the Financial Conduct Authority allows payday lenders to charge.

During its review of the retail banking market, the Competition Markets Authority (CMA) found that over half (51 per cent) of overdraft users went into an unarranged overdraft at some point. The charges really mount up, as the Which? table below detailing the extra costs of borrowing £100 demonstrates.

Mike O’Connor, chief executive at StepChange Debt Charity, said: 'This research shows some of the serious problems that overdrafts can cause and further highlights the need for urgent action. Every day we help people who have regularly exceeded their overdraft limit and been hit with extra fees and charges. This has made getting back on track the next month an even more difficult challenge.

'Our latest research shows that 2.7 million people a year now use overdrafts just to meet everyday expenses. Without action, hundreds of thousands of people risk being stuck in a borrowing cycle, trapped by spiralling fees incurred through just trying to make ends meet. The time has come for the FCA to cap unarranged overdraft charges and look at the widespread problem of persistent overdraft debt.'

So, if you're someone likely to need short-term loans on a regular basis, what's the solution? The key is money management. Is there a reason you're constantly drifting into the red? Take a close look at your finances and see if there's anywhere you could trim costs and cut outgoings.

And if you want some free advice, check out Spectator Money's recent article on seeking help for financial worries. You can read that here.

Helen Nugent is Online Money Editor of The Spectator