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Payday loans – designed to trap you in a cycle of debt

Sack with payday loan company names

I’ve spent months investigating payday loan companies for Which? Money. I was expecting to focus on the eye-wateringly high APRs, which can reach thousands of percent. But what I found was much more worrying.

Payday loan companies defend their high charges by claiming that they’re only designed for short-term borrowing.

And yet, the way some companies work could be encouraging customers to borrow more and more over a longer period.

It’s a roll over

Several companies in our test encouraged borrowers to extend (or ‘roll over’) their loan, sometimes for several months. You have to pay off the previous month’s interest first, but you’ll still incur an extra monthly interest charge of around £25 per £100 borrowed for each month you roll over the loan. Borrow £100 for four months and it’ll cost you £100 in interest.

Some of the lenders told the mystery shoppers in our test that the amount they could borrow next month would be guaranteed to increase, provided they pay this loan back on time. In one case, the initial loan of £100 was followed by a loan offer of £1,200. I think this is irresponsible.

Combine the two

Payday loan companies claim that APRs are irrelevant as their loans are only designed for short-term borrowing – not the full year that the APR implies. However, I believe this picture misses a crucial fact.

Here’s what I could do if I were a hard-up consumer, unable to cope with my finances:

  • Take out a payday loan with company A.
  • Before loan A is due to be repaid, apply for a second loan with company B. Loan B will need to be a bit higher than loan A to cover the interest. Use that loan to repay loan A.
  • Watch out, loan B is due to be repaid! What can I do? Luckily, company A is offering me a guaranteed loan of double the amount it lent me a couple of months ago. I’ll take out that new, increased loan to repay loan B.
  • Double hurrah. Lender B also guarantees to lend me more the second time round, so I’ll use that to pay off the second loan from company A.
  • I can keep doing this until either A or B pulls the plug. At that point I can’t afford to repay the final loan and I go into default, leaving me in real financial trouble.

Payday loans can, in theory, offer a short-term solution to an immediate cashflow problem. However, the structure that many providers have built into their lending systems, whereby loans can be automatically rolled over and/or increased, could encourage cash-strapped consumers to enter a cycle of unmanageable debt that will probably only end in far greater money problems.

Not all payday loan companies work this way. And yet, I find some companies’ apparent disregard for the long-term finances of their clients astounding. What do you think?

Steve Perry says:
21 September 2011

Absolutely spot on with this article, and it is happening all around us. What is also just as worrying is that loan A and B soon become C, D, E and so on if the situation doesnt change – this is exactly what happened to me. I found myself borrowing from 12 different loan companies, many at the same time, for a period of 18 months before it all came to a catastrophic end. In that time I took no less than 64 payday loans !! It is a figure batted about by many, but this figure doesnt include the ‘rollover loans’ from companies such as Payday UK, one of the largest lenders in the game. In 18 months I borrowed only 3 times, yet was paying interest only payments for almost the full duration, it converted less than £1400 of borrowing to over £2700!! Other companies like Wonga I found myself paying in full and borrowing again, at higher amounts because my ‘trust rating’ was going up. Pounds Till Payday actively suggested twice in writing I should pay off and borrow again as the only viable alternative to defaulting, even though they knew of my history!!! I have always stated my own share of the blame, but joint accountability for these issues people across the UK are experiencing. It is the responsibility of the loan industry to identify problem customers and help them, and it is not difficult to see someone borrowing more on a month to month basis is no longer borrowing to pay for a short term emergency situation but for long term cries of desperation. Articles such as this are paramount to increasing awareness of the situation and for that I applaud its creators.


Hi Steve,

Thanks for your comments – we’ve got lots more detail about the investigation coming out this weekend, including the names of the companies we tested and what each was doing wrong. It’s not a rosy picture…


I’m really glad you’re looking into this Martyn.

I feel like Pay Day loan shops have a sinister presence on high streets, cropping up where other businesses have closed down and unemployment is on the rise. I must admit this photo taken close to where I live was not as distressing as some of the other post-riot London images: http://www.flickr.com/photos/sarflondondunc/6026068592/

Duncan Andrew says:
22 September 2011

You have missed a significant point. 4 million people a year use unauthorised bank overdrafts. With new transparent pricing, costs are £5 or £6 a day. So borrow £100 from a payday lender over 30 days and you pay back between £110 and £130 (depending on where you borrow). Have a £100 unauthorised overdraft for 30 days and you pay back between £250 and £280. For managing short term cashflow, payday loans work well for most people and are MUCH cheaper than the overdraft alternative.


Hi Duncan – I agree that unauthorised overdrafts can be hugely expensive. We’ve got some more research coming out over the weekend showing the cost of borrowing through a payday loan company, authorised overdraft and unauthorised overdraft – as you’d expect, it makes a huge difference which bank you have your current account with.

steve perry says:
22 September 2011

Duncan – I believe you are over stating the significance of unauthorised bank overdrafts, it is the same trick other representatives of the payday loan industry have used time and time again. Who is suggesting that people take out payday loans to prevent bank charges? Many of the so called emergency situations involve paying out for vet bills and small holidays etc, which wouldnt necessarily put a person overdrawn. I took my first payday loan to cover a small holiday, had nothing to do with the banks. Also have to disagree with the figures stated. The industry claims people borrow for around 2 weeks on average, so based on your theory people borrow this money to prevent being in an unauthorised overdraft for 2 weeks. Do the maths, have an unplanned overdraft for 14 days and it will cost around 120 pound – less than your payday loan. Would you like me to discuss borrowing 200 pound from a payday lender, and the interest on that? 300, 500?? 750 even. I think not.


I have read that many people who use overdrafts and loans or have large credit card balances have plenty of money in savings accounts. It would be better to keep money in a current account. This could avoid huge interest charges and the interest rates on savings accounts are not very good at present.

Payday Loans claim to be the “Consumer Friendly Lender”. Their website says: “Representative APR 1737% (variable*)” That does not seem very consumer friendly. 🙂

Stuart says:
22 September 2011

These loans are not compulsory. Why is it assumed that none of these borrowers knows what they are doing. A+B-A etc sounds like it would take a bit of planning. Like most products Which? tests, they only work if used properly.

Duncan Andrew says:
22 September 2011

Have the businesses you are to feature been given an opportunity to respond to the assertions made, and will you be publishing what they have to say?