More than one million people are talking out so-called “payday” loans to help them make ends meet, to the concern of debt support groups.
The number of people taking out short-term loans has quadrupled since 1996, with more than £1.2bn being borrowed last year.
Payday loans are usually small loans, typically no more than £300-500, that are targeted at those people who need a quick cash loan for a short-term period, usually to cover exceptional expenses close to pay day.
But the loans have been criticised by some groups, with many short-term loans being charged at interest rates in excess of 2,000% APR, making them an extremely expensive form of borrowing as many short-term loans become “rolled over” when the borrower cannot repay on time.
”Payday loans are a valid form of credit and it’s much better for people to take one out rather than go to a loan shark,” said Sarah Brooks, head of financial services at Consumer Focus.
“But we do think there needs to be a limit on the number of loans people take out and how many loans they are able to roll over.”
However, the pay day loan industry says when managed properly, many people find this type of lending easy to understand and less risky.
”There is a reluctance among many consumers to take on long term loans from traditional lenders, because they feel their financial situation could change,” said John Lamidy from the Consumer Finance Association.
“But they find that the short term credit offered by the pay day loans industry does meet their needs.
”We are working with Consumer Focus to find out how serious the problems they identify are and whether they affect lots of people or just a few,” he added.