Payday loans usually range from £300 to £1000 and since they are supposed to be short-term their interest rates can soar up to 30% or more for some providers. This translates into sky-high annual percentage rates (APR) of 3,000%, 4,000% or more!
3.5 million Britons are considering taking out a payday loan within the next six months, according to a recent research by insolvency trade body R3.
R3, also known as the Association of Business Recovery Professionals, “promotes best practice for professionals working with financially troubled individuals and businesses”. R3’s insolvency practitioners have been raising concern about payday loans and a new kind of “zombie” debtors who only pay the interest charges on their debt and not the debt itself.
R3 president Frances Coulson commented on the issue of payday loans voicing his concerns:
“Payday loans are not the best way to resolve debt struggles. We know that many who take them out find them to be a negative experience, often escalating financial troubles.”
“We hear talk of ‘zombie’ businesses, but seeing individuals run their finances in the same way is troubling. ‘Hanging on’ each month simply cannot be maintained forever. This group will have very few options should interest rates rise or their circumstances change.”
“Having a financial buffer is crucial to weathering periods of difficulty. If struggling to payday becomes a regular occurrence, seeking financial advice should be a priority over short term high interest credit. ”
Of the 2,000 people interviewed by R3, 45% struggle to make their money last until their payday while 60% of those who had taken a payday loan have already regretted the decision. Moreover, 48% claim the payday loan had negative impact on their financial situation and only 13% believe their payday loan impacted positively on their finances.