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Payday lenders are ‘cheaper than high street banks’

Tahmina Mannan
Written By:
Tahmina Mannan

Consumers may be better off turning to payday lenders to make ends meet than take out a short-term bank loan, according to research.

The Chartered Institute for Securities & Investment (CISI) report compared the cost of taking out a £200 unauthorised short-term overdraft from a typical payday lender and high street banks Lloyds and Nat West.

It found the cost of borrowing £200 from the payday lender was £66.

But the charge for borrowing the same amount from Lloyds Bank was £84.22, an APR of over 2,200%, and at Nat West the charge was £110, an APR in excess of 4,000%.

Simon Culhane, Chartered FCSI and CISI CEO, said: “Late last December the Government, as part of the Financial Markets Act, undertook to introduce a cap on the amount of interest that can be charged on a loan. However, this legislation was aimed at payday lenders.

“The scandal isn’t the rates charged by payday lenders but the rates charged by banks. The complete silence on rates being charged by banks for unauthorised borrowing is mystifying.

“If the Government does legislate for a cap on interest we can expect to see the payday lenders focusing on charging fees, rather than interest, which will then allow some real comparison.”

But Michael Ossei, personal finance expert from uSwitch.com warns that people should not suddenly turn to payday lenders as a means to get short-term loans.

He said: “What we need to consider is that this is not a like-for-like comparison. Bank charges are for unauthorised charges, and they are in place to deter people from becoming overdrawn.

“The charges levied by banks stop at a point. So there is cap to how much banks will charge you in a month. Whereas with payday lenders this is not the case.

“Also bear in mind that banks will chase you for being overdrawn unauthorised, so the amount of times the bank will call you or the amount of stress you will get from them, you are more likely to pay back what you owe.

“But with payday lenders they will leave you to it, because they will get the compound the interest on the loan. Remember that bank charges are penalties, and should not be compared to loans from payday lenders.”