A 'Pay Day' Loan is a short term loan taken out for anything up to a month with the amount borrowed being paid off in full by debit card on pay day. However some firms will allow a smaller payment to be made and convert the outstanding balance into a loan to be repaid over a longer period. Loans usually range from £80 to £750.

What is the interest rate on 'Pay Day' loans?

Generally, you will be charged £25 for every £100 borrowed which equates to an interest rate in this case of 25%. This is fine if the amount borrowed is paid off ‘on Pay Day’ i.e. 31 days later but if it is not, the interest continues to build on the outstanding balance and this is where the problems start.

Lenders are required to clearly state what the APR is to two thirds of their customers on their loans and in the circumstances above this could range from 1,355% to as much as 1,845% depending on the lender used, the amount borrowed and the term.

What is APR?

APR stands for Annual Percentage Rate; it includes such things as

• the interest rate you must pay;
• how you repay the loan; i.e. the length of the loan agreement (or term); frequency and timing of instalment payments and amount of each payment;
• certain fees associated with the loan;

Lenders must tell you what their APR is before you sign an agreement and it will vary from lender to lender.

Why do people go to Pay Day Loan firms?

Due to circumstances many individuals are left with no form of credit. Many of those applying would be usually be turned down by main High Street lenders. When they need money to pay for car servicing, replace a broken washing machine or oven, for example or are under pressure to pay a bill to avoid court action they may be panicked into taking what seems to them to be an easy way out.

Consequently, and especially in the current economic climate, these firms are seeing an upturn in business.

What is the Office of Fair Trading (OFT) doing about this?