New research has revealed that payday debts can double in as little as 90 days, because of the hefty charges and interest that lenders dump on top of the original loan.
And with as many as three million cash-strapped Brits forced to turn to payday lenders in the last year alone, an increasing number of people are forking out costs they simply cannot afford.
Under the current law, payday lenders must tell customers the APR they will be paying if they borrow money. However, for the majority of people, this figure means very little and they are unaware of what this means in real monetary terms.
In addition, firms are not obliged to clearly advertise the costs which will apply, if the money is not promptly repaid.
One of the most well-known payday lenders, Wonga, charges interest at 1% per day for 60 days if a loan is overdue. For an original loan of £400 taken out over 30 days, this means the debt can rocket to more than £860 in just three months. The statistics show that as many as 16% of borrowers are unable to repay their loan on time.
Other lenders allow customers to ‘roll over’ their loans if they cannot afford to pay them on time. This allows additional interest to accrue as well as charges and the net result can be a loan which triples in size.
The Consumer Credit Counselling Service said that many people had ‘little idea of the huge sums they will face’ if they are unable to repay on time. Una Farrell ,a spokesperson for the organisation, called for lenders to be ‘more upfront,’ to make it easier for consumers to understand exactly what they could end up having to repay.