Consumers are increasingly turning to expensive “payday loans” from specialist lenders, as high street banks refuse to loosen their grip on credit.
According to research by a consumer watchdog, people who are unable to get a bank loan are now turning to short-term lenders such as The Money Shop and PaydayUK that offer to check credit ratings and approve loans within minutes.
More than a million people in the UK have taken out a payday loan, borrowing £1.2bn in total, according to a report by Consumer Focus published on Saturday.
The market grew by more than 40 per cent last year, while nearly twice as many people took out a payday loan in 2008 as in the previous year. The watchdog said that the market could grow by a further 45 per cent.
Payday loan companies from the US have flooded the UK market in recent years, with advertisements on daytime television and a strong presence online. The companies target people who have unexpected bills, rather than offering long-term solutions to debt.
The Money Shop, the UK trading name of Dollar Financial Corp in the US, which has the largest UK market share, asks on its website: “Need extra cash for life’s little emergencies?”
Borrowers typically pay a set charge of £13-£18 for every £100 borrowed.
The loans are only offered to people with bank accounts and jobs, so are not viewed as a subprime phenomenon, although they tend to be aimed at people on lower incomes. Consumer Focus estimates that two-thirds of loans are taken out by people on salaries of less than £25,000.
Tim Moss, head of loans at Moneysupermarket.com, says many people who take out payday loans are professionals who have “stretched themselves in the times of easy credit”.
“It’s not for people that have never been able to get credit,” he said.
Some people are even turning to the loans to improve their credit rating, as the companies can pass on details of repaid loans to credit reference agencies. The charges on payday loans can also be cheaper than an unauthorised overdraft from a bank.
Consumer Focus has stopped short of following the path taken in some states in the US and recommending that payday loans be outlawed, warning that a ban could push people into using illegal loan sharks.
Instead, it has called for safeguards to be introduced to stop people becoming reliant on the loans, such as only allowing households five payday loans a year. The watchdog also believes that there is a gap in the market for short-term loans that high-street banks might be able to exploit.
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