Easy money? The 'pitfalls' of online payday loans


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Borrowing at short notice used to mean a pleading phone call to the bank. Now though, many new online loan companies promise cash in minutes at the click of a mouse.

"I was a bit short on a Friday night. I wanted to go out with the boys and needed money for my car," said Craig Hart, 21, from Buckinghamshire.

He first borrowed £100 from online loan company Wonga, and 19 days later paid back £125, including fees and interest.

'So easy'

"The first time it looks like a good deal but the next month I ran out of money even more quickly," he said.

How the loans work

    • You go online to choose the size of the loan - between £100 and £1000 - and the amount of time you need to pay it back - up to 31 days
    • The cash is transferred to your account within the hour
    • Some firms also have mobile iPhone and Android apps
    • Full repayment is taken from your account on the agreed date
    • If there's not enough cash in there you could be hit with charges from the lender and your bank

"I ended up borrowing again, until it got to the point where I was using other loan sites just to pay Wonga back."

Ten months later that £100 loan had ballooned into a £7,500 debt with six different lenders.

Eventually he had to tell his family, who lent him the money to pay the sites back.

"I've got absolutely nothing to show for it. It all just went on interest and fees," he said.

"They make it seem so easy, so you've got to have a good head on your shoulders. It was an expensive lesson to learn."

'Online gold rush'

Wonga is one of more than 100 sites that have sprung up over the last five years offering to lend small sums "within minutes" at high rates of interest.

The market is growing rapidly - partly because big mainstream banks have become less likely to agree smaller loans or overdraft extensions.

Wonga claims only a minority of its customers get into any financial trouble.

They make it seem so easy, so you've got to have a good head on your shoulders. It was an expensive lesson to learn
Craig Hart, 21

"We decline two thirds of first-time applicants and more than nine out of ten of our customers repay us on time," said spokesman John Moorwood.

"We provide a simple cost of repayment up front. It's impossible to apply without knowing how much it's going to cost to repay.

"We're servicing hundreds of thousands of customers and the vast majority are very happy."

As with other sites, Wonga caps the length of its loans at 31 days but does allow a customer to extend or "roll over" the debt for three months.

Regular users are able to build up a "trust rating" with the firm, letting them increase their borrowing up to a maximum of £1,000.

'We're all human'

Debt charities are worried about people taking on more and more debt at high levels of interest.

"We absolutely have concerns about how people use these new types of credit," said Una Farrell at the Consumer Credit Counselling Service.

"If you're walking down the street and see new shoes then five minutes later you can have the money in your account - that's not the best way to use credit.

What the loans costs

    • Wonga charges 4,214% APR; other online lenders might be slightly less or more
    • Charges must be displayed as an Annual Percentage Rate - or APR
    • But even critics accept APR is designed for long-term debts and is a poor indicator of how much short term loans cost
    • A better measure might be the 'straight' cost of interest: still high at between 250% and 360%
    • In real money, borrowing £100 from Wonga for 30 days would cost £36.72

"We're all human and we're worried this is being marketed as an immediate solution. What about living within your means?"

Labour MP Stella Creasy has been pushing for tighter controls on the way credit companies are able to operate.

"They are aggressively targeting young consumers over the internet," she said.

"For some people this short term debt can easily become a long term problem. There needs to be better regulation."

In countries like Germany, France and parts of the United States there are laws capping the maximum interest rate lenders can charge.

The government is now looking into the whole market for high interest loans and says it will decide whether to bring in any new regulations later in the year.