Are payday loans replacing credit cards?

By Marianne Curphey

Payday loans have a bad reputation for giving desperate consumers a quick infusion of cash -- and then taking a bite out of their next paycheque in the form of fees and interest charges. Yet UK consumers who are unable to borrow from mainstream lenders are increasingly opting for payday loans rather than turning to credit cards, according to recent research.

A February 2012 report by PricewaterhouseCoopers (PWC), "Precious Plastic 2012," found that some consumers saw payday loans as more convenient and accessible than credit cards. And that, according to PWC, could lead consumers to turn away from credit cards and develop a long-term relationship with payday lenders instead. payday-loans

Payday loans looking more attractive as mainstream lenders raise the bar
Both credit cards and payday loans are forms of unsecured credit, which means that the debt is not secured against something you own, like your house. Following the economic downturn, credit card providers have been trying to tighten up their lending criteria over the past few years to shore up losses. As a result, they are less likely to give out credit to people who are unable to repay their debts and are trying to refocus on responsible lending.

Meanwhile, many consumers continue to struggle in this economy, missing repayments, defaulting on debts and seeing their credit scores deteriorate. That means they likely won't qualify for loans now that lenders are making it more difficult to qualify.

"So you have this double whammy whereby the banks have raised the bar, and consumers credit scores have come down, leading to a significant rise in what we call the 'under banked'," says Simon Westcott, a director at PWC.

Payday lenders are attracting those who may feel they have nowhere else to go -- despite the fact that they often can't afford debt repayments. It doesn't hurt that payday loan businesses are often positioned in convenient locations, stay open later than banks and provide fast service.

Concerns about the way these loans are sold
The Office of Fair Trading (OFT) has also expressed concerns about the growth in the payday loan market. At the end of February, it launched a review of the sector amid concerns that some payday lenders may be taking advantage of people in financial difficulty. The OFT is concerned that some companies are granting  loans without first checking that the borrower can afford to repay them, targeting vulnerable groups and rolling over loans (extending the re-payment period and causing the consumer to pay  more in interest in the long-run).

Other organisations have expressed worries of their own. Consumer research group Which?, for example, has flagged up concerns about payday lenders making misleading claims about annual percentage rates (the interest rate at which consumers borrow money). Which? has also noted that customers might be encouraged by lenders to borrow more than they needed.

Meanwhile, another consumer group, Consumer Focus, is warning that the payday loan market is rife with problems that are getting worse. The danger, according to the group, is in the convenience of payday loans. Consumers can get the money they need relatively quickly -- but, if they don't pay it back on time, the amount they end up owing might exceed the amount they needed to borrow in the first place.

Seek advice before seeking quick cash
Linda Isted, communications manager at the Debt Advice Foundation, said she welcomes the OFT's review into payday loans, "in particular its commitment to investigating loans which are made without adequate credit checks."

If you find yourself having to  pay essential bills by taking out a payday loan, that's a sign of bigger problems, according to Isted. So, before trying to get your hands on more cash, she recommends listing all your outgoings and taking control of your spending. That way, payday loans become what they should be -- a last resort, rather than a crutch to get you to your next paycheque.

If you've already gotten yourself into payday loan debt, turn to a reputable debt counselling service rather than to another loan.

 "Talk to a free, independent debt adviser who will find the best solution for you," Isted advises.

See related: Brits are turning to payday loans for unexpected costs; Many UK families dangerously close to financial ruin

Published: 20 March 2012