Shockingly expensive borrowing options could be all that is left open to people with bad credit histories.
That was the warning from Andrew Hagger at online personal-finance research and data analyst Moneynet.co.uk
He has identified five options to be avoided at all costs: pay-day loans; log-book loans; credit-card cheques; credit-card cash advances; and unauthorised overdrafts.
Mr Hagger said: “As the global financial crisis deepens and borrowing options continue to dry up, the temptation to grab at anything to ease cash-flow problems is understandable, but the exorbitant interest rates involved will only lead to deeper debt.”
Pay day loans – these loans are typically for small amounts, from about £100 to £1,000, which are repayable on the borrower’s next pay day. The only requirement is for applicants to have a job which pays a salary into a bank account with a chequebook or debit card.
Mr Hagger said these loans were billed as the easy, no-hassle way to bridge the gap until pay day, but can charge interest rates equating to 1,355%.
He added: “These lenders boast of not requiring a credit check or any other proof of ability to repay the loan, which means borrowers could have any number of outstanding loans already and still borrow more.
“Just like a free lunch, there is no such thing as an ‘early’ pay day.
“This is just robbing Peter to pay Paul; worse, in fact, because Peter will demand the loan back with massive interest on top. Unless you know for certain that you’re in line for a windfall from some other source, it’s sheer madness to borrow in this way. And, with the job market looking so shaky, for some the next pay day may not come and then the only way is down – fast.”
Log-book loans – Mr Hagger said these loans come a close second in the league of ludicrous loan options.
He added: “Anyone who is the legal owner of a car can borrow between £500 and £50,000 – yes, £50,000 – by using the car as collateral.
“Again, no credit checks are required and it’s even possible to borrow on a car that is still being paid for on a finance deal.”
Mr Hagger said these loans had typical APRs of more than 430%.
He added: “But if you can’t manage this month, how are you going to manage next month with the added burden of massive loan interest to pay? A loan of £1,500 will turn into £1,845 in just one month and a staggering £4,180 over just 78 weeks. If you can’t keep up with the repayments, you’ll lose your car. Sheer lunacy.”
Credit-card cheques – Mr Hagger said that despite widespread criticism and consumer dislike of these unsolicited mail-outs from credit-card providers, these cheques continued to appear on borrowers’ doormats.
He added: “This invitation to borrow more from a bona fide source may seem reasonable and completely above board but interest rates pushing 30% are still way too high, and to add insult to injury, you’ll also be hit with a handling fee (typically 3%). These should be shredded instantly.”
Credit-card cash advance – Mr Hagger said: “This is another ruinously expensive way to get hold of cash, whatever credit card deal you have. Borrowers who have made the sensible move of transferring a balance to a 0% deal will be shooting themselves in the foot if they then bump up their balance with cash withdrawals at around 27%.
“Even with the very best credit-card deals, there’s no easy ride on cash advances. They all carry a high rate and handling fee and, unlike purchases, have no interest-free period. Interest will start clocking up from day one.”
Unauthorised overdrafts – Mr Hagger said the high price to pay for slipping into the red without the agreement of a bank had been widely reported but was still a common trap that was catching consumers out, adding: “Don’t think it’s something that won’t happen to you.
“Arranging an overdraft buffer could save you from setting off a chain of events that snowballs into a bigger problem. It costs nothing and you don’t have to use it, so better safe than sorry.
“The ripple effect of the banking crisis is going to affect everyone in the UK to varying degrees so belts will have to be tightened and budgets will have to be trimmed. With the expense of Christmas and the big winter fuel bills looming on the horizon, cutting back is difficult but falling into the trap of these five financial follies could prove disastrous for many.”