ESSENTIAL GUIDE TO MONEY: Ad campaigns bring payday loans into spotlight - but be mindful of interest rates

Payday loans can be useful – but they can also signify a wider problem for borrowers, says personal finance writer ADAM AIKEN.

PAYDAY loans have been in the public eye in recent weeks with high-profile advertising campaigns by loan providers raising their awareness with consumers.

But such products often draw a passionate response from both advocates and cynics.

The providers themselves are quick to point out that these loans can plug a gap on a short-term basis, and that they can be quite cheap in cash terms. Critics, on the other hand, are at pains to highlight the massive rates of interest attached to these loans.

The truth is that both sides have a point, and both these arguments hold water.

Wonga, for example, charges a whopping typical interest rate of 2,689 per cent APR. That is about 375 times more expensive than the best personal loans on the market at the moment.

But the problem with looking only at the APR figure is that it can distort reality. After all, the “A” stands for “annual” and refers to the overall cost of taking out a loan over 12 months.

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The information you can glean from the APR figure is therefore pretty much irrelevant when calculating small loans that are paid back within a few days.

Wonga would no doubt prefer you not to focus on the APR of 2,689 per cent but instead to consider that a loan of �200 for five days will typically set you back �15.63 in fees and interest. Yes, it might still be better for you to look for a competitive overdraft from a high street bank, but the fact is that an emergency payday loan doesn’t have to cost the earth.

But all this misses the most important point. The spotlight should instead be turned on to those people who feel the need to take out such a loan.

If you are one of those people, ask yourself the following questions:

• Has an unforeseen emergency cropped up or are you just poor at budgeting?

• Is a payday loan something you find that you regularly need?

• Will you have sufficient money to repay the loan (plus interest and charges) on time or will you need to borrow from elsewhere to meet your commitment?

If borrowing in this manner is something you regularly need to do or if you find that you are constantly juggling your debts, a payday loan is not for you. It is likely to be part of a slippery slope that will see your finances continually getting worse.

Debt consultancy Vincent Bond & Co reckons that the people it deals with often have up to 10 “smaller” outstanding debts with payday-loan companies on top of their larger borrowings. That suggests that far from simply tiding someone over until the next pay cheque arrives, a payday loan can quickly become a millstone around a borrower’s neck – and it can often lead to further smaller loans being taken out as the borrower starts to lose control.

The likes of Wonga are mainstream lenders and there is a place for them. They are properly regulated, and using such a lender is a far better option than turning to loan sharks.

But before you take one out, ask yourself whether it’s going to be a one-off or whether it’s symptomatic of a larger problem.

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