April 4, 2011

Are Payday Cash Advances Too Expensive Pitched Against Other Short Term Finance Options?

Everytime the media starts talking about payday loan advances, it is a rare occasion when the seemingly high representative APR is not mentioned. It appears that everyone is set on having a go at the payday loan companies calling them everything under the sun from loan sharks to out and out thieves. So are payday loans as bad as everyone tries to have you think they are?

It is a popular topic of discussion but for people who are not fully aware of how an APR (Annual Percentage Rate) actually works, which is most people, it is not difficult to jump to the wrong conclusion. We have been conditioned to evaluate credit offerings by comparing the APR of financial products. However, this creates a large problem when evaluating short term loans.

payday loan advances

Annual Percentage Rate was introduced to enable the comparison of interest rates on an annual basis and this is the cause of the problem. It is the rate of interest applied to a loan in a year. Because most conventional loans run for more than a year, using the APR to compare the loans works ok. However, most payday loan advances are only designed to run over a short period of between 7 and 31 days. So if you use an APR when comparing short term loans, the interest actually charged is grossly distorted.

Usually a payday lender will charge around £25 for every £100 borrowed for the agreed duration of the loan. What this means is that if you borrow £200 for 28 days, you repay £250 when it is time to pay back the loan. That calculates out at an interest rate of 25%. This equates to an APR of around 1737%, which is totally misleading.

So is the APR irrelevant when it comes to payday loans? When you hire a car for a day, you want to know how much it is going to cost you. You are not in the least bit interested in how it will cost you £14,600 for a year, you want to know that it is £40 a day. Most payday lenders make the costs of borrowing totally transparent and up front. You know before you take out the loan that if you borrow £200, it is going to cost you around £50 in interest charges provided that you pay back the loan at the agreed time. No other lending practice is that transparent.

So, the picture is totally distorted if you use an APR to compare payday loan advances. This view is also supported by the OFT (Office of Fair Trading). They published an interim report on high-cost consumer credit, saying:

“Consumers appear to find the inclusion of the total repayment amount more helpful than an APR in understanding the cost of short-term credit. This may be due to the information distortion which results when an APR is applied to low sums over short periods.”

Interestingly enough, high street banks are not required to display their charges for overdrafts as an APR. It would be interesting to see what would happen if they did as interest and charges levied on unauthorised overdrafts can have an APR in the millions!

If you bank with Lloyds TSB and go overdrawn for 10 days by £200 without permission, you would pay £85.95 in charges. This consists of eight daily charges of £10 for being overdrawn without permission, a £5 ‘usage fee’ and 95p interest. These charges equate to an APR of 46,450,869%.

Lloyds dispute this by saying that the charges are capped at £85 monthly. However, if you were to have gone overdrawn by a smaller amount, the same charges would have applied with the result that the APR would have been even more monumental.
With Santander, an unauthorised overdraft of £200 could cost you £60.68, an APR of 1,586,122%.

So whilst quoting the APR is not actually helping the consumer when it comes to payday loan advances, what is more scary is the actual charges being forced upon us by our high street banks that are the truly staggering numbers in the world of finance. Yet they do not have to display these charges as an APR, and they are often buried in the small print so they are less obvious.

Britain’s banks are charging up to £20 a day on unauthorised overdrafts. It is only the fact that the banks recently won a high court battle, alongside the fact that there is no astronomical attention grabbing APR to publish, that allows them to get away with it.

Banks made an estimated £2billion from charges such as these in 2009 so it is small wonder that they will fight to protect a huge source of revenue such as this.

So are payday loans too expensive? Well if your only other option is to go overdrawn without permission, then considering those costs, I hardly think so. Find out more about payday loan advances here.

Tags: lending practice, high-cost consumer credit, what this means, payday loan companies, high court battle

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Comments on Are Payday Cash Advances Too Expensive Pitched Against Other Short Term Finance Options?

May 2, 2011

meredithelaine @ 5:10 pm

I really do have to thank you and IG for being such a huge source of inspiration to me. Your humor and positivity and just having a freakin' clue is something that I admire so much in the both of you. I miss you both so very, very much, and I know that I have been out of the loop for a while, but hopefully me coming back into the blogging world will change that. I LOVE YOU.

May 16, 2011

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May 28, 2011

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June 4, 2011

Find Free Articles - ArticlesBase @ 2:13 pm

'Always use short-term credit irresponsibly!' – rejected Money Tree ad copy.

June 8, 2011

Rob Lewis @ 7:00 am

No more bailouts put UK's biggest banks in danger of ratings downgrades –

June 13, 2011

changeFIFA @ 5:57 am

Macquarie wins High Court battle: report #asxbusiness

June 19, 2011

Twitter @ 9:32 am

Sean, there is no semantic analysis of data within images being done, except for maybe a little OCR. For the most part, the image search is just a reduction filter, that creates a binary hash of the image's contrasts. Most likely applying a reduction filter on this image, might give you a graph or just a m*n matrix filled with 0's. Sorry, about that Shawn.

July 2, 2011

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September 8, 2011

Loans Insurance News Tips @ 10:42 am

The man reportedly jumped off a casino building to escape from loan sharks who held him captive for not repaying US$2,000.
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October 13, 2011

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November 17, 2011

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Do you blame the car salesman for selling you a car that cost more than you could afford? On a smaller note, do you blame Vizio's sleak advertising and Best Buy's multiple finance options for the fact that you sink $2,000 into a TV you later realize you can't afford?Where is personal responsibility? Why is that not a factor? And is it really contributing to the dialogue to call those of us who disagree with Obama's plan "whiney lemmings"??]]>

November 22, 2011

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November 27, 2011

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November 28, 2011

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January 3, 2012

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January 23, 2012

ben @ 11:33 pm

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February 10, 2012

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March 13, 2012

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March 23, 2012

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Bank refunds £3,700 to woman who paid for surgery on one of its cards, offering 'ray of hope' in PIP implants scandal A woman who was given PIP breast implants that ruptured has recouped the full cost of the surgery from her credit card company. She said Lloyds TSB refunded her £3,700 on the grounds that she was sold faulty goods. The British Association of Aesthetic Plastic Surgeons (BAAPS) said the move should offer a "ray of hope" to other patients with PIP implants. The woman, a hairdresser in her 40s from the Midlands who did not want to be identified, underwent a breast enlargement operation in 2008. She discovered she had been given PIP implants last September when she found a lump and went to a breast cancer clinic. "I was quite worried, but I was told it was just a rupture of my implants. It was only later I realised there was a health risk. I was really quite poorly with it," she said. The woman had the implants removed on the NHS in October, and contacted a firm of…

April 30, 2012

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