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| Payday loans can put credit rating at risk | Payday loans can put credit rating at risk |
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| Cash-strapped borrowers who are tempted into taking out a payday loan to avoid the astronomical costs of an unauthorised overdraft could face even worse problems later on, the Financial Ombudsman has warned. | Cash-strapped borrowers who are tempted into taking out a payday loan to avoid the astronomical costs of an unauthorised overdraft could face even worse problems later on, the Financial Ombudsman has warned. |
| Research by consumer advice website watchmywallet.co.uk shows it is cheaper to take out a small short-term loan with Wonga at a rate of 4214% APR than go into an unauthorised overdraft with any of the major banks. The website replicated the situation of someone running out of cash just before their payday by comparing the cost of borrowing £11 for two days from Wonga, and through an unauthorised overdraft with six high street banks. While the Wonga loan would cost £5.83, RBS and NatWest would charge £12, Santander would charge £20, Barclays £22 and HSBC £25. Only Lloyds TSB comes anywhere near Wonga, charging £6. | Research by consumer advice website watchmywallet.co.uk shows it is cheaper to take out a small short-term loan with Wonga at a rate of 4214% APR than go into an unauthorised overdraft with any of the major banks. The website replicated the situation of someone running out of cash just before their payday by comparing the cost of borrowing £11 for two days from Wonga, and through an unauthorised overdraft with six high street banks. While the Wonga loan would cost £5.83, RBS and NatWest would charge £12, Santander would charge £20, Barclays £22 and HSBC £25. Only Lloyds TSB comes anywhere near Wonga, charging £6. |
| The figures support claims by Wonga that using an APR or annual percentage rate calculated over an entire year to show how much its loans cost is unrepresentative, because the loans last a maximum of 30 days. | The figures support claims by Wonga that using an APR or annual percentage rate calculated over an entire year to show how much its loans cost is unrepresentative, because the loans last a maximum of 30 days. |
| Watch My Wallet editor Sean O'Meara said: "This research just goes to show how excessive bank charges are. We certainly don't recommend Wonga loans as a reasonable or cost-effective way to manage your debts, but the fact that a 4214% interest-rate loan can be cheaper than going £11 over your overdraft for just a few days is something that we believe should be brought to people's attention This is the small print at the bottom of bank statements that people rarely read – and it's the kind of thing that can drive people further and further into debt if they're not careful." | Watch My Wallet editor Sean O'Meara said: "This research just goes to show how excessive bank charges are. We certainly don't recommend Wonga loans as a reasonable or cost-effective way to manage your debts, but the fact that a 4214% interest-rate loan can be cheaper than going £11 over your overdraft for just a few days is something that we believe should be brought to people's attention This is the small print at the bottom of bank statements that people rarely read – and it's the kind of thing that can drive people further and further into debt if they're not careful." |
| However, those who use payday loans to avoid unauthorised overdraft fees could have other problems. The Financial Ombudsman Service told The Observer that while it has had few complaints about the loans, it has seen evidence mortgage lenders discriminate against payday loan borrowers. | |
| "The number of complaints we receive about payday loans is relatively low but we have had a number of inquiries from consumers who have been told by their lender that previous payday loans they have taken out – and paid off on time – have and will continue to have a detrimental impact on their credit rating," said a spokesman for the service. | "The number of complaints we receive about payday loans is relatively low but we have had a number of inquiries from consumers who have been told by their lender that previous payday loans they have taken out – and paid off on time – have and will continue to have a detrimental impact on their credit rating," said a spokesman for the service. |
| Credit reference agency Experian lists payday loans separately rather than including them in a general overview of borrowing history. James Jones, head of consumer affairs for the agency, said that while some lenders do not differentiate between payday loans and other forms of credit, "some high street lenders might see the fact that you've resorted to payday credit as a sign that your finances are under pressure … if a particular lender's experience is that customers who take out payday loans are more likely to miss their repayments, this will be reflected in their credit scoring". | Credit reference agency Experian lists payday loans separately rather than including them in a general overview of borrowing history. James Jones, head of consumer affairs for the agency, said that while some lenders do not differentiate between payday loans and other forms of credit, "some high street lenders might see the fact that you've resorted to payday credit as a sign that your finances are under pressure … if a particular lender's experience is that customers who take out payday loans are more likely to miss their repayments, this will be reflected in their credit scoring". |