Whilst it may be preferable not to have to make the choice, borrowers faced with the prospect of either having to exceed their arranged overdraft limit or taking out a payday loan would be better off doing the latter, according to research from Cashfloat.co.uk.
Cashfloat, who describe themselves as being “a moral lender, running the business based on honesty and transparency”, say that they, “along with the rest of the country, were shocked to find out how much an unarranged overdraft can cost you.”
Peter Kimpton, Chief Operating Officer at Cashfloat, added “we realise the responsibility this puts on us – with more people turning to dynamic payday loans as the preferable option, we have to ensure that our loans truly are cheaper and easier to use than ever before.”
In addition, Cahsfloat has introduced a further layer of flexibility into its deals; customers are given a unique client login which they can use to “take full control of their loan, displaying clearly the exact cost of repayment and how they can save on interest by paying early”.
Customers can use the tool to type in the amount they wish to repay at any given moment and receive information about what overall saving this would represent.
Cashfloat belongs to Western Circle Ltd which is an FCA Authorised direct lender, and prides itself both on “fundamentally good morals” and “the most advanced artificial intelligence technology designed to help and protect people taking payday loans online.”
According to Cashfloat’s website, the average payday loan is roughly £270 over a 30-day period, and the industry, which has experienced rapid growth since the global financial collapse of 2008, was worth as much as £2.2 billion in 2012.
A report released by the Office for Fair Trading the following year suggested that practices such as unfair conduct, irresponsible lending practices and aggressive collection practices were far from uncommon.
FCA regulated payday lenders can charge a maximum daily interest rate of 0.8%, which is expensive, working out at around £50 to borrow £200 for a two-month period, but because lenders, including Cashfloat, can often make the funds available the day they are requested, they are a popular choice amongst short-term borrowers.
Cashfloat argue that over a 28 day period, a bank can potentially charge up to £90 for a £200 loan thanks to payments related to somebody exceeding their overdraft limit,, whereas the maximum a firm like Cashfloat can charge is £22.40.
59% of borrowers are single, according to research conducted by the firm, 18% married and just 3% divorced. A study conducted by ACCA in 2012 showed that 12 million short term cash advances were made in the UK in 2012; £3.7bn worth of credit was issued, an increase from just £0.33 billion in 2006.
A significant danger when dealing with a payday loans company is the concept of the “rollover”, a situation where, unable to pay off all of their debt one month, a lendee “rolls over” the debt until the end of the next month, incurring further interest charges.
Allegedly, the Telegraph newspaper discovered in the summer of 2013 that 17 out of 50 lenders inspected by the Office of Fair Trading were discovered to be actively promoting rollovers in marketing material, and that there was evidence of up to 12 consecutive rollovers being arranged by some payday customers, leading to levels of debt and amounts spiralling into uncontrollable amounts of debt.
Now the FCA has imposed a limit of just 2 interest-only rollovers per loan. Fees and interest charges have also been capped and customers are being treated better, according to Cashfloat.
3 month loans are another option the payday lenders are looking at, repaid with a smaller amount spread over each month rather than a lump sum at the end of the period, the disadvantage being the greater interest paid due to the length of the loan.
However you look at it, securing emergency funds in the form of a loan is expensive – you pay through the nose for the convenience of earlier access to capital.
News that more is being done to regulate the sector is welcome, however, and it’s undeniable that there is considerable demand for pay day loan products. More honesty and transparency would allow lenders to step into an entirely new market of more upmarket, possibly bigger spending clients.