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WHEN LOAN SHARKS GET CHIC, IT’S TIME TO STAY AWAY FROM THE WATER. SO TRY SAFER WAYS OF STRETCHING YOUR £ TILL PAYDAY…
Like Aloe Blacc, do you need a dollar? Don’t turn to your good old friends “whisky and wine”: just use your mobile to call up some more.
But I’m not talking about one of the latest banking apps which allow you to move around money which you actually have. No, according to a company called Ferratum, which says it is Europe’s biggest provider of “online microloans”, young people are increasingly using their mobile phones to borrow to tide them over when they run out of cash. Ferratum says it has seen “huge interest” since launching in the UK last month.
“The average age of our customers is 30-32 and 70% are working full-time,” says the company. “These people have an income, but need our help because they are temporarily out of cash.” (What about the 30% who are not working?)
Their typical customer is aged between 30-32 and looking to borrow about £150. You go online, use a loan calculator to work out how much you need and how long you want to pay it back, with a maximum of 45 days, and what it will cost.
Then you apply, and after a credit check taking up to 15 minutes, you’re in the money. Once you have signed up by e-mailing your ID, next time around you can just apply with a text message.
The Ferratum website currently has a special offer: “For a limited period we will offer each First-Time customer an INTEREST FREE microloan of £50 (15 days term). You can borrow £50 and pay back £50!! Why not give it a go and become a customer today. We are confident that you will be impressed with the speed at which we process your application.”
And after that, you can simply send a text and borrow £50 to tide you over till the end of the month, say for 10 days. Try the calculator and you’ll find out how much it will cost: £6.50
Not shocked? Well how about borrowing the typical £150 over the maximum 45 days? The computer says yes, that will be £222 please – interest cost of £72 or nearly 50%. But according to the standard APR method of calculating the real annual interest rate, it works out at 3113%.
Then there is Wonga, which offers loans at 4214%. Not quite as new on the block, Wonga’s name appeared on Blackpool FC’s shirts last season, though it met some opposition when it did a similar deal with Hearts north of the Border. A senior Church of Scotland minister Rev Ian Galloway said the rates of interest were “colossal” and warned: “A significant number of people in Scotland have rising debt problems. There is the potential for this to get much worse when people are paying such high rates of interest.”
The issue of high-cost lending has been a highly debated topic in recent months, with MPs proposing new legislation to cap the interest charged by payday loan companies back in January. However the Office of Fair Trading has made the decision not to go ahead with the proposed cap on interest, instead enforcing an industry-wide code of practice to tighten activity.
Wonga is desperate to show that it is different, and responsible.
It says: “We sit outside the pay-day loans industry. This is a new product for a new generation of people looking for short-term loans. The APR is really irrelevant and misleading but we are expected to put it on the website. We don’t compound interest and we don’t make loans for a year.”
Wonga’s website has a big section on ‘why we are a responsible lender’.
It says it encourages early repayment, with no penalty charges, and “doesn’t encourage people to stay in long-term debt”.
But on the due repayment date, the due amount is removed from your bank via debit card – so it had better be in your account, or the bank charge meter will start running. It also boasts “crystal clear and up-front pricing with no hidden tricks” – that doesn’t make it cheap.
Most prominent on the website is the message I am reading, at 20:38, “Welcome to Wonga! We can deposit up to £400 in your bank account by 20:58 today. Existing customers may be able to borrow up to £1,000, depending on your current trust rating.”
Pay-day loans companies offering high-cost cash are nothing new – the sector is valued at £7.5bn, according to the OFT. Money shops such as the Cheque Centre and QuickQuid, as well as pawnbrokers, seem to be springing up on every corner as the economic winter bites. But marketing on football shirts, and targeting the app generation, is giving high-cost borrowing a new respectability – making it almost chic.
Beware microloans at macro-cost, do your best not to run out of cash, and if you need £100 to tide you over regularly, there is a cheaper solution. As featured recently on this blog, several current accounts offer overdraft buffers, of £100 or more. Yes, you will have to pay it down before running up to the limit again – but that’s also the case with Ferratum and Wonga. The banks will charge you a monthly fee of £5 to £7.50. But that would work out a lot cheaper than microloan rates.
If you are so confident of always being able to pay it back within 45 days, why not use a credit card? Most cards allow free credit of up to 56 days providing you pay back on time. Not to mention cards with special offers of interest-free purchases for months on end.
Admittedly, for those in financial difficulties who are mired in debt, these are not viable options. But according to the “new generation” trendy lenders, it is the “savvy” young earners who are their target market. For my money, savvy and Wonga don’t mix – it’s one or the other.
MY BORROWING TIPS
If you need to restrain your spending…
…avoid credit cards and stick to a debit or cash card. If you must have a credit card, pay it up each month. If you need time to pay up, consider a balance transfer to a card that will give you a breathing-space of a year or more on interest payments, for a fee of around 3% of your outstanding balance.
Watch the balance carefully and pay up when the 0% period ends.
If you find yourself dipping into the red regularly…
…look carefully at the current accounts on offer. Paying £7.50 a month for the Halifax or Bank of Scotland Ultimate Reward, for instance, allows you to run up to an overdraft limit of £300. That £90 over a year is less than the cost of a £300 loan over 30 days from Wonga (£96) – and you’ll get travel and mobile phone insurance thrown in.
If you keep running out of cash before payday…
…but are not sure why, try an online budgeting tool. Banks such as Lloyds TSB are beginning to offer this service, but one site, money dashboard, cleverly combines your bank and savings accounts with your credit card, and shows you exactly what is going where and when.
Ignore those mailshots
These claim you have been specially selected to receive a credit card. A typical player in this market is Vanquis, which charges almost 40% interest. Avoid store cards like the plague, as their interest rates are up to 30% or more, but especially avoid applying for credit at online shops, such as Very, where the going rate is nearer 40%.
Seek advice for free
National Debtline and the Consumer Credit Counselling Service both provide a free advice service by phone and internet – you should never pay for it. As a first step CCCS offers an anonymous online ‘Debt Remedy’ service with tailored advice from its debt counsellors.