Yesterday the Competition and Markets Authority (CMA) announced a series of proposals to drive down the costs and improve the transparency of charges for payday loans customers.
The plans include forcing lenders to provide details of their products on accredited comparison websites thus making it easier for new entrants to compete. This will be a big improvement on the current situation whereby those with the biggest marketing budgets win most business by targeting consumers with daytime TV advertising.
These moves are welcome and are expected to save the estimated 1.8 million payday loan borrowers in the UK around £60 per year.
However more still needs to be done to make consumers with an imperfect credit record aware that a payday loan may not be the only option available to them.
For a start there are a number of specialist credit cards on the market designed to help people repair their credit record by proving they can manage and repay their card balance.
The main players in this market are Aqua, Luma, Vanquis and more recently Tesco Bank with its Foundation Credit Card.
The interest rates charged on these ‘non prime’ credit cards range from 28.9% APR to 49.9% APR, a step up from the rates charged for mainstream plastic, but still way cheaper than going down the payday loan route.
To put the cost difference into perspective, if you borrowed £400 for 1 month on a card at 39.9% APR and didn’t pay the balance in full when the statement arrives, your interest charge would be £13.55 (or 44 pence per day). Borrow £400 from Wonga for 31 days and you’ll be charged an extra £131.21 – that’s an equivalent of £4.23 per day.
Longer term borrowing
Borrowing £750 from Payday UK over 12 months will mean making repayments of £122.33 per month and will cost you a total of £717.96 in interest charges over the year.
If you borrowed £750 over 12 months on the Aqua Classic Card at 39.9% APR your repayments would be £76.82 per month and you’d pay back a total of £171.84 in interest charges – plus Aqua offers free access to your credit score, so you can keep tabs on how you’re improving from month to month.
Similarly another lower cost way of borrowing £750 over 12 months, is by using a guarantor loan from the likes of Amigo at 49.9% APR which would cost you £77.29 per month and total interest charges of £177.48, much less of a drain on your bank account than the fast cash payday option.
To qualify for a guarantor loan you need to find a creditworthy friend or relative to act as guarantor for your loan. This means that if for some reason you are unable to pay, then the guarantor becomes liable for the outstanding balance.
Again the interest rate is a fraction of that charged by payday providers, plus it offers flexible terms, including the option to make additional ad hoc overpayments without a financial penalty.
Another important plus point is that Amigo also feeds back your payment history to the credit reference agencies, so again paying on time every month is another step towards a healthy credit score.