Such seductive offers.

Pity about those 4,200% interest rates: We reveal the harrowing human stories of Britons taking out short-term loans at extortionate rates
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The 'payday loan' phenomenon is now thought to be worth £1 billion a year Thousands enticed into short-term loans with outrageous interest rates

By Zoe Brennan Last updated at 9:37 AM on 8th December 2011

Three-and-a-half million adults are considering taking out an extortionate payday loan over the next six months as almost half the population struggle to make ends meet. The number of people who run out of cash before the month is up has increased by seven percentage points since this time last year. Payday loan companies are now worth £2bn a year with some lenders charging interest rates of more than 4,000 per cent, leaving borrowers drowning in debt. Here is the story of how such loans have a devastating affect on those who can least afford it.

Hers is one of the desperate human stories behind a merciless trade which preys on some of the most vulnerable in society. The woman, who posts a desperate message on an internet advice forum asking for help, admits: ‘I haven’t told anyone my problem, not even my fiancé. I owe various companies a whopping £2,751. I have been so stupid.’ Her debts are the result of what are known as ‘payday loans’ — designed to tide people over until the next salary cheque or benefit payment arrives — which she took out with no fewer than seven companies.

Reassuringly expensive: The Money Shop advertises its wares with a picture of a glossy, smiling woman proffering a tempting fistful of crisp £20 notes

Now, the woman’s hours have been cut at work, she is in arrears on her council tax and is having trouble paying even the extortionate interest payments on her loans, never mind paying off the loans themselves. The companies have failed to respond to her pleas for a freeze in interest so that she can set up a sensible repayment plan to clear her debts. She is also unable to contact them, explaining: ‘I have tried to call, but keep getting the “your call is in a queue” message. I don’t have a landline and can’t afford to stay on hold on a mobile.’ She adds: ‘I know I have only myself to blame. I’m upset, angry with myself and extremely scared.’ The unfortunate woman is far from unique. She is just one of thousands of Britons who are being enticed into taking out short-term loans for huge fees at outrageous interest rates as lenders make a fortune out of the nation’s most desperate financial cases. The phenomenon is now thought to be worth £1 billion a year. Taking out a payday loan is a kind of financial Russian roulette which is devastating scores of families. Fail to pay back what you have borrowed after a month, and the loan starts to build up a horrific pile of interest many times the original sum.

Controversial: Errol Damelin, co-founder of UK firm Wonga

Inevitably, many people simply borrow again from other sources to cover the original debt — thus falling into a cycle from which it can be impossible to escape. At this time of year, particularly, when families are struggling to cope with the costs of Christmas, it is more tempting than ever to borrow a few hundred pounds. But in the cold light of January it could prove to be a disastrously expensive mistake. The loan industry itself claims that two million people have already used a payday loan, while research by the insolvency experts trade body R3 suggests 3.5 million more are considering the idea. Its research also found that 60 per cent of people who have taken out one in the past regret the decision, while 48 per cent felt the loan had made their financial situation worse. Just 13 per cent believed their payday loan had a positive impact on their finances. R3’s president Frances Coulson says: ‘Payday loans are not the best way to resolve debt struggles. We know that many who take them out find them to be a negative experience, often escalating financial troubles.’ Nearly half of payday loan customers have an income below £15,500 — with 10 per cent earning less than £11,100. As bank lending has dried up, they have found themselves with fewer places to turn for desperately- needed funds. There are a number of payday loan companies in Britain, all with friendly names such as Wonga and KwikCash. And they are all very keen to lend money to rich or poor.

It’s all the same to them, though self-evidently the longer it takes people to pay the money back, the more the firms make in interest. And how. Wonga’s representative APR — the rate of interest that would be charged on an annual loan — is 4,214 per cent. The company points out that although its APR is high, the actual interest paid can be far lower than an unauthorised bank overdraft. For the loans are just short term, it says, and APR is an ‘annualised’ rate which ‘distorts’ the figures.

'They took the child benefit from my account'

On its website, however, a handy calculator informs new customers they can borrow up to £400 instantly, and that this will cost them an astounding £225.47 to borrow for a maximum of 55 days. Another company, The Money Shop, advertises its wares with a picture of a glossy, smiling woman proffering a tempting fistful of crisp £20 notes. ‘Cash for life’s little emergencies,’ she proclaims reassuringly. ‘Cash ’til payday — never be out of pocket! Get up to £500.’ Disturbingly, KwikCash allows you to borrow money simply by typing a few digits into your mobile telephone. Its website says: ‘KwikCash Instant cash loans — a potential lifesaver.’ Another, QuickQuid, announces: ‘Bank Closed? QuickQuid is Open!’ PayDayUK, meanwhile, says cheerily: ‘Don’t say Mayday. Say PayDayUK! Apply for a payday loan from £80-£750 and you could have the money in your account by midnight.’ Borrow £750, though, and you will have to repay £937.50 when your pay cheque arrives a few weeks later. Over a year, this would represent a staggering APR of 1,737 per cent. In contrast, Lloyds TSB is offering an £8,000 loan paid back over five years at an APR of 15.4 per cent.

Anger: As soon as you default on your loan, the images of smiling models on the website fade and you enter a Dickensian world of debt collectors, court judgments and bailiffs

It is easy, then, to see how people get into a bottomless pit of debt through such pernicious payday deals. And yet the adverts are everywhere — proliferating across the High Street, daytime television and on public transport. There is even one company promising special Christmas payday loans ‘faster than a sleigh’. One woman posted on an internet forum: ‘I took out a payday loan — everything was fine. They kept increasing my credit limit, and like a fool I said yes. I recently had my pay date in the month changed, and I informed them by email. They said that was fine. However, I then received an arrears notification email.’ She arranged to pay £50 every two weeks until she had cleared the £455 loan. To her consternation, though, larger sums were taken. ‘But when I went to the bank today for my child benefit, they’d taken two card payments — one for £105 and one for £20. ‘This is the full child benefit gone. Are they allowed to do this?’

You fall into a Dickensian world of debt collectors

Another borrower posts on the Consumer Action Group website: ‘I had a payday loan for £400. When I couldn’t repay it back in full, I contacted them and offered to pay in instalments, which they refused.

‘I heard nothing from them until today, when I received an email from a debt collection agency stating that I owed £3,424 and that I should contact them to arrange repayment. ‘I do not have an issue with repaying what I initially borrowed, but do not understand how they have come up with the figure they have.’ There are hundreds of similar stories and cries for help, all loaded with anger towards the companies which pursue the interest payments with such inflexible vigour. Because as soon as you default on your loan, the images of smiling models on the website fade and you enter a Dickensian world of debt collectors, court judgments and bailiffs. It is an awful spiral: your credit rating goes down the pan, you are unable to borrow at sensible interest rates again and so the debt trap engulfs you. Little wonder that the Bible proclaims the wrath of God against the moneylenders. So how much money do these companies make? And who is pocketing the cash at the expense of so many wretched debtors?

Awful spiral: Your credit rating goes down the pan, you are unable to borrow at sensible interest rates again and so the debt trap engulfs you

One of the most high-profile firms, Wonga, was founded by two men: Errol Damelin, 40, a former investment banker, and Jonty Hurwitz, 40. The business has made them both millionaires. Damelin is a skiing and marathon-running enthusiast who brazenly says of his business: ‘We are the good guys. Yes, we’re . . . controversial. But it is an important social service. To have social mobility you have to have credit available to people where its required and where it’s appropriate.’ A veteran of two successful web start-ups, his head office is a grand Georgian townhouse bordering Regent’s Park in North London which one visitor says ‘could easily pass for the HQ of a private bank’.

Hurwitz, originally from Surrey, lives in some style, too, and likes to collect sculptures. Overall turnover at Wonga hit £73.8 million in 2010. QuickQuid, meanwhile, is owned by a 60-year-old Texan named Daniel Feehan. He lives in a milliondollar mansion in an exclusive enclave of Fort Worth, Texas, and picks up a salary of £440,000 as chief executive of Cash- America, QuickQuid’s parent firm. The Money Shop, where you can pawn valuables, cash cheques and get payday loans on the High Street and online, is owned by the U.S. company Dollar Financial. It had just one shop in the UK in 1992, but now has 400 branches scattered across the country. It has just bought PayDayUK, the biggest British internet payday loans operator. Another firm, Dollar Financial, is valued at £477 million, and funds a luxurious lifestyle for its American board. Its chief executive, Jeffrey Weiss, earns a basic salary of $985,000 (£628,000), and enjoys more than $1 million (£637,000) in share options and bonuses. The company also pays more than £20,000 a year for his country club fees — a stark contrast to his impoverished customers, who are scrabbling around for a few hundred pounds to eke out their finances. In total, Weiss was paid nearly $5.5 milion (£3.5 million) in 2010. Rather than express concern about the plight of those who use his firm, he sees big profits in the British market. Weiss said in January: ‘I think we’re maybe 25 per cent of the way towards our target in the UK. I think there is a potential for 1,200 locations.’

'The lenders pop up from nowhere - yet it's all illegal'

An alarming thought indeed. The fact is, however, that Britain’s financial laws are relatively lax compared to some other European nations, making the UK a massive untapped market for these companies, who are capitalising on the misery of the recession. So what can be done to stop the vulnerable falling victim? It is reassuring to learn there is growing criticism of payday loans. MPs from all parties signed an Early Day Motion last week — in the hope of triggering a debate — noting that Wonga is advertising an interest rate of 4,214 per cent. It said: ‘This House notes these high interest rates are often paid by the poorest in society; it believes all financial institutions have a right to make a profit, but that these companies are adding to poor families’ financial problems; and further believes that the time is right to restrict the level of interest that can be charged on loans.’ Labour MP Stella Creasy is campaigning against what she calls ‘legal loan sharks’. She says: ‘These companies are just popping up from nowhere. And it’s all completely legal . . . the figures confirm what I’ve been warning the Government about for over a year — that there are now millions of Britons who can’t make ends meet as prices rise and unemployment bites, and a lack of regulation means they’re prey to legal loan sharks. ‘This toxic situation also effects these people’s willingness to spend, which is so vital for our economic recovery. The Government must act now to stem the explosion of personal debt.’ Last year, Creasy introduced the Consumer Credit (Regulations And Advice) Bill, designed to cap the total amount that can be charged for providing credit — including late payment or default fees.

She also wants to widen the availability of more responsible lenders, and to regulate the proliferation of payday lenders in some areas. The proposals received much backbench support, but were not backed by the Government. Her constituency, Walthamstow, is one of the poorest areas of London. Within its boundaries, there are three high-cost credit shops. There is an alternative: there are local ‘not-for-profit’ associations called community credit unions which offer cheaper loans which do not spiral out of control in the manner of payday loans. They offer short-term loans with a maximum 26.8 per cent APR, and work in conjunction with the Post Office. Some states in America have brought in legislation restricting the payday loan firms. When Washington state last year limited such loans to eight loans per person a year, and gave people a ‘repayments in instalments’ option to fall back on if they got in too deep, the lenders said it made their business unsustainable — illustrating just how much they rely on people falling behind in their payments. A third of lenders went out of business. In the UK, the Government is undertaking research into how a cap on interest would affect consumers, though one can imagine that the multi-million-pound firms making such healthy profits would take a very dim view. Uncle Buck, yet another of the seductive firms, says: ‘We are committed to lending responsibly; we don’t want to put people into debt by lending them money that they can’t afford to repay. ‘A payday loan is a short-term cash advance that is there to help you when unexpected expenses arise, helping you manage your cash flow.’ If a payday loan is paid back within a month, Uncle Buck says, the interest is in the region of 25 per cent of the loan. When people allow the loan to drift, however, as we know, they find it escalates at alarming — and often overwhelming — speed. There’s little doubt a cap on these extortionate interest rates would be a welcome Christmas present for thousands of beleaguered debtors.

Comments (23)
Newest Oldest Best rated Worst rated View all They obviously were NOT taught the meaning of NO when they were youngsters ! Just saying NO ! Plus a bit of SELFDiscipline ! THAT is all it takes ! But THAT is what they lack ! Revolting Pensioner ( That's ME ! ) PLUS ! I am NOT in debt to ANYONE ! " Neither a Borrower, or Lender be ! " - B.W.Moore.Mr, Stockton on Tees, 08/12/2011 09:59 Click to rate Rating (0)

Report abuse I was in my bank the other day and couldn't help over-hearing the distressed woman at the next till. Her company was

going to be a few days late paying her salary. Instead of going to the bank first to get a temporary overdraft she had taken out one of these loans. The lender had taken its fee from her bank account and then failed to make the deposit - making her problem many times worse - Alan, Northamptonshire, 08/12/2011 09:53 Click to rate Rating (0)

Report abuse The UK is HOPELESS at regulating financial activities. You do begin to wonder whether that is because our legislators are benefiting from this sort of abuse, or simply the regulators are dimwits. Regulate now, set maximum interest rates never greater than APR equivalent of 50% and see this sort of nonsense disappear overnight. Why not? What's the problem? We have to protect the financially innocent from themselves, or face the prospect of taxpayers paying out endless amounts in legal fees and benefits to those who can't stop themselves using these sharks. - Colin, Shrewsbury UK, 08/12/2011 09:48 Click to rate Rating 1

Report abuse I wondered where all the local loan sharks that were shut down by the police had gone. - GrumpyOldPensioner, Manchester, 08/12/2011 09:47 Click to rate Rating 2

Report abuse Now we've nationalised some banks it's a pity that a now frills account cannot be offered with low/no overdraft fees . Government is happy to bail out the banks, it should also help it's struggling citizens, but no THAT would interfere with the market! - Terry, MK,UK, 08/12/2011 09:37 Click to rate Rating 7

Report abuse Still, it sounds more fair than the government's and local council tax system. - Colonel, Birmingham, 08/12/2011 09:35 Click to rate Rating 1

Report abuse The problem with these companies is that they ask for your debit card number as a way for them to collect repayments. Once they've got this number, they can take as much money as they want from your account at any time they want and there is nothing your bank can do about it. I would advise people NEVER to give their debit card details to anyone except to make a genuine purchase. You can cancel a direct debit - you can't cancel these debit card payments. - SUSAN, OLDHAM, 08/12/2011 09:31 Click to rate Rating 6

Report abuse I bet most countries wouldn't allow such punitive rates but UK government knows whose side it is on. - Derek , Bedworth Uk, 08/12/2011 09:30 Click to rate Rating 8

Report abuse I know someone who had his entire paycheck cleared out by The Money Shop when he got into debt with them, the money must have been in his account for just a few hours before they took it and he had nothing left to pay his bills/food shopping with. They prey on the weak and must be stopped.

- Tim Kirk, Nottingham, 08/12/2011 09:25 Click to rate Rating 10

Report abuse Such extortionate rates of interest should be illegal. It is out and out usury. No financial institution of any kind should be allowed to charge more than, say, fifteen times the bank base rate, which is a big enough profit margin for anybody. - Alan Cadwallender, Manchester., 08/12/2011 09:19 Click to rate Report abuse Rating 10

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