In an unprecedented move, defying all critics of the payday loan industry, one of UK payday loan lenders introduced a new service – interest free payday loans. Attracting massive amount of publicity, Instant Loans Direct, announced the arrival of market leading 0% interest payday loans. Launched in October 2010 and based in West Midlands, Instant Loans Direct is naturally far from being a charity and the interest free period is only available for up to 8 days, starting from 23 November. After the eight day period, the lender charges a very reasonable interest of 50p a day for every £100 borrowed. To be eligible for 0% interest payday loans an applicant must be at least eighteen years old, in permanent employment, earning at least £750 a month. To take advantage of the zero percent interest payday loans an applicant also needs to have a UK bank account and a debit card. New borrowers can access from £50 to £300, but those who have used the service before and repaid the payday loan on time, can apply for up to £750.

The offer and associated marketing frenzy attracted a lot of media attention. Even though payday loans may often be a lot cheaper than unauthorised overdraft fees charged by most major high street banks, the offer was subject to criticism from a debt management charities. Both Citizens Advice Bureau and Money Advice Trust warned consumers about dangers lurking behind zero percent interest payday loans. Consumer Credit Consuelling Charity also raised concerns about the company business model which allegedly relies on an assumption that applicants will be unable to repay the loan on time and thus start accruing astronomical interest, which will then be rolled over and added to subseqent loans by the unscrupulous lender.  Funny enough, no-one has ever heard charities being concerned about 0% introductory deals offered by credit card companies, nor about penalty fees charged by some major high street lenders. Those penalty fees, when compounded, make interest charged by even the most expensive payday loan lenders pale in comparison.

This new addition to UK payday loan industry is, without a doubt, good news for consumers. Product innovation increases competitiveness and encourages healthy competition, both on price and on service. The introduction of zero percent payday loans is a great way of attracting publicity. When applied correctly, 0% interest payday loans could allow consumers to avoid hefty unauthorised overdraft bank charges many people fall victim of towards the end of the month. Instant Loans Direct founder, Giles Coutts, assured that the lender carefully selects the borrowers ensuring they only offer credit to people who can afford to repay it. According to Mr Coutts, the company enjoys a very low default rate – only about 2% of their clients failed to repay the loan on time. The Instant Loans Direct website offers a clear comparison of most payday loans lenders and overdraft charges charged by sone major high street lenders. This allows consumers to make an informed choice about how to satisfy their short term financial needs. Instant Loans Direct is a lender, not a broker – cutting out the middleman allows then to offer low rates and a groundbreaking interest free payday loans.

There are many ways you can get help when you need a quick loan – payday loans are becoming more and more popular. Gone are the days when you needed to go across town and visit a brick-and-mortar type establishment where you left a post-dated cheque or a valuable item as a collateral for your payday loan. Today, vast majority of payday loans are issued over the internet, from the comfort of applicants home. Usually, there is no need for any income verification, no need to sent post-dated cheques – payday loans are repaid by Direct Debit instead.

With the arrival of internet, the number of payday loan lenders has grown. Presently, there are roughly about twenty payday loan lenders available on UK market plus at least another hundred payday loan brokers. The major difference between a payday loan lender and a payday loan broker is that the former lends its own money and the latter matches prospective payday loan borrowers with payday loan lenders willing to offer a payday loan.

Applying directly to a payday loan lender definitely has some advantages. If you heard a lot of positive feedback about a particular payday loan lender (Wonga, Quick Quid, Payday Express etc) or if you have dealt with them before, you may wish to prefer to approach a payday loan lender directly. If this is the first time, however, when you apply for a payday loan, or if you have just been declined, you will probably be much better off trying to get a payday loan from a payday loan broker, rather than directly from a payday loan lender. There are several advantages:

1. payday loan brokers usually have access to a wide choice of payday loan lenders, increasing your chances of being accepted

2. payday loan brokers get commission from a payday loan lender for introducing business to them, but the payday loan you will get should not cost a penny more – having said that, some payday loan brokers charge upfront fees – it’s best to carefully read their Terms and Conditions to avoid surprises later

3. some lenders run out of funds, go through software updates or go offline at certain times of the month – a good online payday loan broker will instead direct your enquiry to a payday loan lender which has funds available and is looking to lend

In most cases, a payday loan application submitted to a payday loan broker is instantly presented to several payday loan lenders. Should one payday loan lender decline it, the application is immediately sent to another one. This entire process happens behind the scenes and within a few seconds a prospective borrower is transferred to a website of a payday loan lender which accepted the proposal. Just like with car insurance or airline tickets – most people don’t bother checking every single insurance company for a quote or approaching every airline to find tickets to a holiday destination. Instead, most people simply approach a comparison website. Your consumer rights are protected, as long as you make sure the payday loan broker you are using is licensed by the Office of Fair Trading. There are many illegal websites, steer well clear of them – use only properly licensed and regulated payday loan broker to match your financial needs with a reputable payday loan lender.

Payday loans have always been associated with extortionate interest rates, usury and loan sharks in trench coats wielding baseball bats. Even UK MPs, who are supposed to be more intelligent than average Joe Bloggs, tell sob stories of their poor unemployed or low income constituents struggling to repay £200 loan. Child molesters probably enjoy better reputation than payday loan lenders, even though they act according to present law and even sponsor public events and football teams every now and again. As usually, reality is stranger than fiction and facts seem to rain heavily on the parade of payday loan opponents.  According to recent study by Instant Loans Direct, which analysed information about 75,000 of their clients, a whooping 57% payday loan borrowers earn between £25,000 and £50,000 per annum. This means that a significant majority of people applying for payday loans earn more than national average salary, sometimes nearly twice as much.

This is a stark contrast to a hostile propaganda of the most vocal opponents of payday loans, who claim that payday loan borrowers are “financially distressed” and “in trouble because of high cost credit”.  This rhetoric maybe useful for winning votes in Walthamstow, but statistics paint a completely different picture.  Consumer Finance Association, which represents UK payday loan lenders insists that UK consumer credit regulation standards is much higher than any other country in the world. All UK payday loan lenders and brokers must obtain a licence from the Office of Fair Trading before commencing trading and must comply with strict UK and EU credit legislation, which even regulates the size of the font used to display the APR of a loan. Payday loans are only available to those UK residents who have a steady job, a bank account and enough disposable income to be able to afford to repay a payday loan with interest at the end of the month.

An average payday loan borrower in the United Kingdom is a young adult, usually free of significant financial commitments and reluctant to take long term unsecured loans to cover a temporary financial emergency. Many people find that payday loans, although expensive, provide a simple and transparent way of managing short term financial problems. An independent market research conducted on behalf of one of the major payday loan lenders in November 2010 demonstrated that 97% applicants said the lender did exactly what they promised and they have not experienced any nasty surprises. Further 86% borrowers would recommend a lender to a friend and 66% admitted that, despite what Labour MP Stella Creasy might think, payday loans represent good value for money. According to data released by Financial Ombudsman Service, there were less than 60 complaints registered against UK payday loan lenders between July and December 2010. At the same time, UK consumers lodged over 10,000 complaints about current accounts, about 8,600 complaints about credit cards and nearly 3,000 complaints about bank overdrafts and bank loans.

Some anti-payday loan activists demand introduction of interest rate caps.  Such caps were introduced in several other countries and US states, but instead of making payday loans cheaper, they simply made them unavailable. This pushed consumers into the hands of illegal or unlicenced providers or made them miss their rent or mortgage payments, incurring penalty fees which make interest payable on payday loans pale in comparison. Taking away choices is not a feature of 21st century market economy – less choice and more government regulation always ends up harming customers.

Demand for payday loans increased by 58% in the first two weeks of May 2011, when compared with the same period in April, according to a comparison website moneysupermarket. Payday loans are getting more and more popular in the United Kingdom anyway – according to Consumer Focus, the number of borrowers applying for payday loans quardupled over that past four years. April and May, however, turned out to be very profitable for payday loan lenders thanks to a combination of Bank Holidays. First, we had Easter – in England and Wales, Good Friday and Good Monday are both Bank holidays. Then we had just three business days until another day off – royal wedding, which was then followed by Bank Holiday Monday.

The combination of the above not only cost the UK economy as much as £5bn, but also meant lower wages for unskilled workers and other people paid hourly wages. This resulted in a record number of payday loan applications submitted online, as many British consumers struggled to make ends meet.

Payday loans also seem to be more popular in Scotland, than England, Wales and Northern Ireland. Insolvency trade body R3 reported that 43% Scots find it difficult to make it from one payday to another and nearly 20% of payday loan borrowers from Scotland had problems repaying payday loans. At the same time, only one in ten English borrowers struggled to repay a payday loan. Personal debt levels in Scotland increased by nearly 50% and the average personal debt is now £20,000.  No wonder that a huge demand makes payday loan lenders chose their clients very carefully. According to John Moorwood, a spokesman for one of the major payday loan lenders Wonga.com about two thirds of first time borrowers are declined. As a result, less than 10% of Wonga’s clients end up having problems repaying their payday loan on time.  In the meantime, Wonga.Com is colonised another niche left by major high street banks and launched an iPhone application allowing prospective borrowers to apply for a payday loan from their mobile device. Naturally, the move has been slammed by critics of payday loans, who maintain that this only makes access to payday loans easier.

According to a recent article in The Huffington Post, one of the most popular US blogs, several mainstream American banks started to cash in on the popularity of payday loans. A report from US Center for Responsible Lending shows that banks frequently offer those loans to client who have checking accounts with them.

CRL found that an average payday loan borrower applying for a loan will end up paying over $900 in interest to borrow $500 for no more than 180 days. An average consumer then ends up spending more than 44% of their next salary to repay the loan, which in turn makes it nearly impossible to make ends meet without taking another high interest payday loan. CRL research also suggests that Social Security recipients (in other words, retired elderly people on fixed income coming from government benefits) are 2.6 times more likely to rely on payday loans than an average bank client. Nearly a quarter of all payday loan borrowers in the USA are retired seniors.

The Huffington Post also quotes 2010 Bloomberg article, which reports that major US banks, including fourth-largest bank in USA U.S Bancorp, but also others like Wells Fargo & Co and Fifth Third already started offering payday loan type financial products. To avoid negative publicity surrounding payday loans, they are known as “checking advance products” instead, but work exactly the same. The interest rate reaches 120% annually (this does not assume interest compounding). This puts them in a direct competition with cheque cashing services and online payday loan operators and allows them to replace lost income from overdraft fees. The average interest on a bank-issued payday loan is 120%, allowing the lender to make much more money than on a credit card, which statistically charges only 13.1%.

In addition to engaging in payday loan lending directly, US banks often offer back-up financing to payday loan lenders. Major US players in the payday loan industry, such as Advance America, EZCORP or First Cash are backed by JP Morgan, Bank of America or Wells Fargo.

Following a review of high cost credit published by the Office of Fair Trading in December 2009, the Department for Business, Innovation and Skills and the Treasury announced today that it will commission its own study of this subject.

The move was prompted by calls to arbitrarily cap the cost of credit, including payday loans, coming from several sources. One of the most vocal opponents of high cost lending, a Labour MP for Walthamstow, Stella Creasy, previously proposed such cap in Parliament in February 2011. The motion was not successful, thankfully the Parliament is full of people who believe in the forces of free market economy and understand that a hastily imposed cap will make it much for difficult for legitimate lenders to operate and will push people who need to borrow money fast into the hands of unlicensed loan sharks. Members of Parliament also understand math, unlike the advocates for capping the cost of credit – a recent poll on Martin Lewis’ Money Saving Expert website revealed that majority of people think payday loans should not cost more than £10 in interest for a £100 payday loan BUT AT THE SAME TIME want the annual APR to be capped at 10%. Most people don’t realise that in order for annual APR not to exceed 10%, an interest on a £100 payday loan should not exceed £0.80!

Another research, this time commissioned by Joseph Rowntree Foundation, raised several interesting points. The research focused on the feasibility of starting a non-profit payday loan service, funded by the government £18 million subsidy – in other words, funded from our own taxes. Leaving this aside, the study concluded that in order to cover operating costs the loans would need to cost at least 123% APR. Bringing the APR down to less than 100% would cost a further £90 million subsidy. It would still be very difficult to attract genuine borrowers as sudden appearance of cheap credit would result in an influx of deadbeat applicants, with credit profile so bad they can’t even qualify for a regular payday loan. Even at that level of interest, the business would only start to cover it operating costs in year 5 and would not reach profitability until year 10. Why waste taxpayers money on such a project?

According to recent Daily Mail article, more than two million people applied for payday loans last year. Daily Mail warns payday loan clients to repay their commitments on time to avoid penalty charges mounting up, which is exactly what payday loan lenders advocate anyway.

The article reveals that applying for a two week £200 payday loan may turn out cheaper than going into an unauthorised overdraft with your bank. Daily Mail quotes the Moneyfacts comparison website, which claims that a Halifax current account customer who exceeds their unauthorised overdraft by £100 for 46 days would be charged £5 penalty charge a day. This would bring their total debt to £330, however a Halifax representative claimed that the bank would never allow penalties to accumulate this way.

By comparison, Wonga.Com, probably one of the most expensive payday loan lender, displaying a Representative APR of 4214%, will only charge £41.92 in interest and charges for a 35 day £100 loan. Moneysupermarket’s head of loans and debt comparison Tim Moss warned payday loan clients to not to borrow money until absolutely necessary and avoid a spiral of debt if they are in a situation where they need to take out a payday loan every month to make ends meet.

Moneysupermarket also revealed that they notices a 58% surge in payday loan searches after Easter and May bank holidays, which left many British consumers short of cash.

Daily Mail reports that Financial Ombudsman Service, which resolves disputes between payday loan clients and lenders, received 597 enquiries last year – 130% more than a year before. FOS only investigated 59 complaints and only two thirds were ruled in client’s favour. When we compare this number with over 2 million payday loans issued last year, the amount of complaints is probably much lower than complaints against mainstream lenders. Payday loan, or any other loan for that matter, will only turn into an expensive nightmare if it is not repaid on time.

Most people probably realise that nearly every time a lender considers a loan application, their credit history is being checked. Adverse credit history may prevent you from getting a mortgage, a credit card or even a payday loan. There are certain steps you can take to improve your credit history, which will then allow you easier access to credit and will mean lower interest rates in the future. Those five simple steps will help you improve your credit history:

1. Check what’s on your credit file.

Credit referencing bureaux hold a fair bit of data about every one of us. Address history, open lines of credit, history of payments, financial associates, enquires from another lenders – in an ideal world, all this information should be accurate. Errors and mistakes do happen and they usually affect the credit rating in a negative way. Correcting any errors or ommissions in your credit history should be the first step.

2. Register yourself on the electoral roll, even if you don’t ever intend to vote.

Lenders like to confirm and reconfirm everyone’s address – for two reasons. Firstly, they like to know where to call if the borrower defaults on a credit commitment. Secondly, some borrowers like to conceal the addresses where they lived whilst they defaulted on their past credit commitments. Tracing everyone’s address history over the last 3 years allows lenders to get a full picture of borrower’s past behaviour. Make sure the addresses you declare on loan application exactly matches your credit history file.

3. Noting will look better on your credit history than paying all your bills on time.

If you have trouble remembering when your bills are due, set up direct debits to make sure you are never late (ensure you will have enough money in your account to pay it). If you have a credit card, set up a direct debit for a minimum payment – you can always overpay later. Remember that cheques and bank transfers must be sent at least 3-4 business days in advance – lender’s don’t care when you sent it, they want the money in their account by the due date.

4. If you have no credit history, apply for a credit card.

Do it at least a year before you try to get a big loan – a car finance or a mortgage. Use it for small shopping every month and ALWAYS pay the balance in full – this way you will avoid paying interest! One year of responsible management of a small commitment should give lenders enough confidence to trust you with a larger loan.

5. If you have split with your partner recently, make sure the credit referencing agencies are aware of that.

During a relationship breakdown, many people neglect their finances. If you have applied for a credit with your ex in the past and you have since split, write to credit referencing agencies and complete a Notice of Disassociation – do it even if you were not married. This will prevent your credit rating being dragged down by your irresponsible ex-partner who stopped paying their bills. The information about you and your ex-partner no longer being together will be shown on your credit history.

Everyone is entilted to a copy of a statutory credit history report from major agencies: Experian, Equifax and CallCredit. You can also apply for a FREE Experian credit report, which will not only show you the contents of your credit history file, but also calculate your credit score to give you an idea on how the lenders might perceive you. If you forget to cancel the free trial, your card will be charged £14.99 a month. This service will allow you to monitor your credit history and react in case you notice suspicious entiries you do not recognize – this may be a sign of ID theft. You are free, on the other hand, to cancel in the first month and see you credit history file and credit score without any charges. This will be a good start and will allow you to take control of your finance, improve your credit rating and consequently save you money in the future!