As money becomes a bit tight, payday loans are fast becoming a part of everyday life for many people…but they come at a high price.

A ‘payday loan’ is a sum of money less than your next payslip that can be applied for at short notice.

It enables you to borrow up to £1,000 over 31 days, which then has to be paid back; normally with hundreds of pounds added on in interest.

Now, offshore money-lending companies are targeting cash-strapped borrowers in the UK via the Internet and charging them interest rates in excess of 2,000%!

Some lenders come from the US, where payday loans have become big business since the credit crunch started over there.  One, Pounds Till Payday, operates from Malta and its website states their annual interest rates of 2,225%.

Peter Tutton, debt policy adviser at Citizens' Advice said:

'We are concerned that although payday loans have been on the UK high street for some time they are now springing up in increasing numbers online. Until recently people on a low income could still access loans from mainstream lenders but now the banks have closed their doors to higher risk customers.'

Payday loans are targeted at those of us who are desperate as we cannot get money elsewhere. No credit checks are carried out and all that is required in most cases to get the money is your bank account or debit card details. The money is paid into your account the same day and is debited straight from your account (with charges) 31 days later.

This no-questions-asked approach to lending is irresponsible, say the debt charities, tempting people to borrow money with no prospect of repaying.

Guide to Payday Loans

Need loan advice? Use our loan calculator and talk to an impartial loan adviser

Debt On Our Doorstep, a coalition of debt charities and credit unions, is so concerned about payday loans that it has tabled a motion in Parliament calling for their investigation.

Damon Gibbons, chair of Debt On Our Doorstep said:

'We would suggest that not bothering to run any credit checks or verify income constitutes irresponsible lending and would like the Office of Fair Trading to look at whether these companies should have their credit licences revoked.'

Citizens Advice came across one case of a single parent with a 10-year-old child who had multiple debts of £8,000. Her weekly income when she came to the CAB consisted of £83 statutory sick pay and £200 in state benefits. One of her debts was a payday loan, taken out online, with an APR of 1,355%.

'Her mental health was deteriorating and her financial situation was becoming increasingly impossible,' said a Citizens Advice spokesman.

Repayment scales

The following amounts are charged for every £100 borrowed:

• Pounds Till Payday £29.98* 
• Payday Express     £20.00
• Month End Money  £25.00

(* it was revealed that a £59 charge would be added to the bill if it was not repaid on time; this is not advertised anywhere on their website)

Debt advisers are worried that the squeeze on conventional credit will lead to a similar situation as in the USA, where payday loan companies are now. In some parts of Cleveland, the Ohio city hardest hit by the sub-prime mortgage crisis, all the conventional banks have been replaced by payday lenders!

Payday loans are so notorious that they have been banned in certain states; in New York, annualised rates of interest offered by any lender cannot exceed 25% But even in New York the number of so-called 'check-cashing shops' is on the rise.

The biggest payday loans company, the MoneyShop, owned by US company Dollar Financial, has 250 stores in the UK and recorded 55% lending growth in the last quarter of 2007. 

Payday loans are being heavily advertised  on the internet and are even offered via big-name financial comparison website's Moneysupermarket.com and Moneyexpert.com.

Sean Gardner, chief executive of Moneyexpert.com defended their position saying: 

'Payday loans have their place, but people have to be very clear about what they are signing up for. There are rightly serious criticisms about the product and they should come with a health warning.'

So, are payday loans a serious financial threat that should be avoided at al costs? Or is there a place for them despite their drawbacks?

Have you made use of a payday loan? How did you find the experience?