The introductory 0% offer could see debts soon spiral out of control, says Citizens Advice and the Money Advice Trust
Debt counselling charities have warned struggling borrowers not to be lured by the offer of interest free, short-term loans.
The loans, offered by short-term lender InstantLoansDirect.com, charge 0% interest for the first eight days, then 50p a day for every �100 borrowed until the loan is repaid.
This equates to an interest rate of 448.3% APR. "In contrast, most payday loan lenders charge an APR of over 1,000%; with the likes of Wonga charging as high as 4,000%," the firm said in its press release.
Joanna Elson, chief executive of the Money Advice Trust, said there were sometimes circumstance when this kind of offer would be useful for people, but added: "There are, equally, circumstances in which this kind of offer can be dangerous for vulnerable people struggling with their finances.
"The big fear with high interest, short-term lending is that people start to roll-over the loans if they are unable to meet initial repayments. This means you can start attracting astronomical interest payments on what might have been a relatively small loan to begin with."
Elson added: "This company will actually lose money if people take up its 0% offer and then make the repayment as scheduled. However, there is profit to be had in those cases where borrowers are unable to meet that repayment and so incur interest charges, and it is these people precisely who should not be accessing more credit."
She said that taking out more credit was rarely the best solution for people struggling to make ends meet from one month to the next. "It is better to get some free, impartial advice from the likes of National Debtline or Citizens Advice. An adviser can help you work out your budget and let you know what your options are for dealing with your debts. You can also do this yourself online with services like My Money Steps," Elson said.
Moira Haynes, spokeswoman for Citizen Advice, said the number of debt clients the charity saw with short-term loans, often referred to as payday loans, has increased fourfold in the past two years, and a high proportion of clients with payday loan debts were already in financial difficulties when they took out the loan.
"The problem with payday loans for our clients is not just the cost of the loan, but the way in which it is very easy (especially if you're using the loan to try and manage other debts) to get sucked into a perpetual cycle of rollover," she said.
"Another concern is the ease and speed with which they can be obtained, and the lack of checks by some lenders. We see cases where people who are not working and on very low incomes are able to get payday loans."
Una Farrell, a spokeswoman for the Consumer Credit Counselling Service charity, agreed: "CCCS would warn anyone to approach this with extreme caution. This company's business model, as with all payday lenders, is built on people rolling over the loan and incurring astronomical charges and interest."
Giles Coutts, founder of InstantLoansDirect.com, denied the interest free loans were a cynical ploy to attract new customers, and suggested 0% introductory deals on credit cards were no different.
He said the firm had strict lending criteria, including an insistence that borrowers be employed, and that the short-term loans offered a good alternative to other forms of lending, including unauthorised overdrafts charging �6 a day.
The 50p a day for every �100 borrowed charge was "not that different from you taking me to Starbucks and buying me a coffee to thank me for lending you �100," he said.
"We're hoping we can help consumers at a time when they might be struggling financially and that our 0% interest free short-term loan will be a quick and easy solution to their problem. We hope customers can see that not all payday loan companies are out to make a quick buck and hope to highlight the usefulness a payday loan can provide."
The loans will be available for the last eight days of each month, and must be repaid by 11.59pm on the eighth day to avoid interest charges. Borrowers are able to apply for loans from �50-�300 in size, but only if they have never borrowed from the company before.
Loans will go on sale for the first time from 23 November. Potential customers must be 18-years-old or more, employed and earning no less than �750 a month, and have a UK bank account and valid debit card.
Source: http://www.guardian.co.uk/money/2011/nov/16/debt-charities-warn-against-payday-loans
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