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How not to borrow
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The Government is upping consumer protection by banning credit card cheques, but there are still plenty of dangers lurking for the unsuspecting borrower. We show you how not to borrow
Unsolicited credit card cheques could be banned by the Government as part of reforms to reduce the number of people struggling with debt.
The Government’s Consumer White Paper, which was published last week, aims to promote responsible borrowing and lending. As well as the proposed ban on credit card cheques, it plans to stop lenders raising borrowers’ credit limits without their consent or increasing interest rates on existing debts.
Credit card cheques are similar to cheques issued on current accounts. The debt is added to your credit card balance but at a higher rate than normal purchases. There are also no interest-free days before the debt attracts interest and the cheques can often attract a “handling fee” of around 3% too.
But as well as credit card cheques there are several other dangerous ways to borrow that should be avoided if at all possible.
Payday loans
What are they? Payday lenders such as PayDay UK, Quick Quid and ePayday Loan basically offer you a cash advance on the salary you're expecting at the end of the month. Once you’ve received your wages you pay the money back and typically pay £25 for every £100 borrowed.
What to watch out for: Payday loans are designed to be paid back within a matter of weeks but charges can spiral if you can’t pay the money back when it’s due. The APR on these loans can work out to more than 1,500%.
What the experts say: Ed Bowsher, head of consumer finance at lovemoney.com, says: “If you have so much debt that you’re considering taking out a payday loan, it’s time to rethink your approach to money. As a first step, get some free advice from National Debtline. They can help you turn your finances around so that you won’t have to borrow at 1,500% in future.”
By Emma Lunn, July 2009
