Doing the Numbers on a London Payday Loan

by Jennifer Case on December 22, 2011

London payday loans have become a popular resource for working people to access quickly needed funds between paychecks. The number of people taking out payday loans in the UK quadrupled to 1.2 million in 2009, generating roughly £242 million in revenue — around 20% of total lending for that year. Borrowers took out approximately 4.1 million individual loans, amounting to £1.2 billion in money lent. Payday loan borrowers take out an average of 3.5 loans a year, at an average amount of £294.

In a sign of the payday loan industry’s rapid growth in the UK, Dollar Financial acquired the largest British Internet payday lender, PayDay UK, in February 2011. The company has since predicted that its retail lending network could grow from 350 outlets to approximately 1,200.

Cash Advance is not a lender and thus does not compete with any London payday loan providers. Rather, our site acts as a conduit for connecting prospective borrowers with payday loan providers in the London area. Our easy online application allows anyone age 18 or older with steady employment to get pre-approved in minutes for a payday loan, with no cost or obligation.

The paradigm for a London payday loan involves a relatively small amount of cash (£ 50 – £1,200) borrowed for approximately 2 weeks (next payday). Under the Consumer Credit Act 1974, London payday loan providers must have a licence from the Office of Fair Trading (OFT) to offer consumer credit. Advertising of London payday loans must clearly state the “typical APR,” especially in adverts indicating that credit will be extended to customers who otherwise may not qualify for traditional loans.

A typical London payday loan incurs a flat fee of £20 for every £100 borrowed, meaning a £300 loan would cost £360 if it were repaid after one month. Since there are no legal limits on “rolling over” loans (extending repayment), a payday loan rolled over for several months could cost far more than the original amount borrowed. For this reason, it’s wise to only take out a payday loan when money is urgently needed, and you’re sure you will be able to repay the full amount with your next pay cheque.

There are no restrictions on the interest rates payday loan companies can charge. One London payday loan provider offers a “typical APR” of 1,355 percent. Although this seems shockingly high, it takes compounding into account; without which, the APR would be a more approachable 300 percent. Most payday loan companies charge 25 percent for an advance repayable at the end of the month. A few payday lenders charge 30 percent, which, when compounded, is equivalent to an APR of over 2,000 percent.

According to Consumer Focus: “The cost of obtaining a payday loan online (£25 — £30 per £100) exceeds the cost of obtaining a loan on the High Street (£13 — £18 per £100) because [payday loan providers] reject more applicants and face higher rates of fraud and default.”