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The Lesser of Two Evils

The Lesser of Two Evils…? Pay day loans

I’m sure you will have heard the bad press surrounding Pay Day Loan companies. As their sky high Annual Percentage Rates (APRs) are highlighted and many call for the government to step in.

You hear facts that if you took out a hundred pound loan out with them, over 7 years you’d rack up debts of a ‘x’ trillion pounds. Whilst it is true APRs of payday loan companies are extremely high, and I certainly wouldn’t recommend in all but a limited few circumstances, they are not the only institutions facing calls from financial regulators to change their practices.

If you look at the way banks charge for unauthorised borrowing it paints an interesting picture. Many banks charge you a fixed fee for going into your bank overdraft or over your authorised lending limit. If you go over this limit by £5, there will be a fixed charge, which in some cases is up to £30. I’ve tried to calculate the APR but it is too large a figure for Microsoft Excel to handle. So it is certainly a larger percentage than would fit on a calculator.

A study undertook, albeit by a payday loan company, showed APR charged by six high street banks for going over your overdraft by £200 for 10 days, ranged between 8,657% and 46,450,869%.

Also note, most banks ensure your largest payment comes out of your account first with smaller payments coming out after. This tactic can effectively ‘hike up’ bank charges as detailed below.

As an example, if I have four direct debits coming out of my bank account on the same day with a balance of £400.

Payment 1: Rent/Mortgage Payment £350

Payment 2: Gas and Electricity £50

Payment 3: Council Tax: £100

Payment 4: Water: £30.

Certain banks will ensure that Payment 1 leaves your account first, leaving your balance at £50. Then they process the Council Tax payment of £100 making my account overdrawn and incurring a charge for processing a payment I don’t have the funds to cover. This will then be repeated for payments 2 and 4. Leaving me further in my overdraft, after three charges I received for three payments I didn’t have the money to pay for.

As I’m sure you can work out, if the bank processed the smaller payment first, I would have been able to pay Payments 2, 3 and 4 without going into my overdraft and I would only receive one charge for Payment 1.

My advice is to regularly check your bank balance and be aware of payments coming out of your account. Then, if you know you’re going to go into your overdraft or over your limit, pick up the phone. Give your bank a call and they should be able to offer you an alternative method of financing these payments with a much lower charge.

Calls have been made to review the unauthorised overdraft charges by financial regulators for the government. In the mean time, however, customers will still face these fee charges.

As you can see from the above, short term or unauthorised lending can add a considerable cost to your monthly expenditure. So I would seek out alternative methods of obtaining finance e.g. a bank loan or increasing your agreed overdraft limit. These may be more difficult to set up but they should help you out in the long term.

Are you struggling with the costs of day to day living and fear your finances may spiral out of control? Call our team of financial advisers for free confidential advice on 0800 458 3320.

By Chris Bentley

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