Beware loans that could make you pay and pay

Are you struggling with debt? A charity has made a complaint to the Office of Fair Trading about debt-ridden twenty and thirty-somethings being targeted by internet ads from loan companies lending money at APRs of up to 1,355%. Credit Action has complained about adverts displayed on social networking website Facebook for "payday loans" which are basically cash advances on the salary borrowers are expecting at the end of the month. It also included "logbook loans" - a loan secured on the borrower's car - in its complaint which says the adverts break advertising regulations by failing to give details of interest rates.

The charity says that with credit becoming less available from traditional high street sources, social networking sites such as Facebook, hugely popular among young people, are seen as fertile marketing ground for expensive credit. It's advising Facebook users to warn the website about adverts which break the rules.

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Payday loans are big business in the US and have been blamed for exacerbating the country's housing and economic crises - and now they are over here too and cashing in on the fact that credit is increasingly difficult to obtain for some people.

PayDay UK is one of the companies advertising on Facebook but a quick Google search brings up firms such as Quick Quid, ePayday Loan, Payday Express and SamedayMoney all offering the same type of loan and claiming to be the answer to consumers' financial woes.

In most cases all you need to qualify is be over 18-years-old, have a full time job, a bank account and a debit card. The debt is re-paid on payday either by a post-dated cheque or by debit card.

Expensive credit

Payday loans are designed to be paid back over the short term. Generally they allow you to borrow between £80 and £750 until you get your salary and most charge £25 for every £100 borrowed. So if you take a loan of £500 you will repay £625 when you get paid by your employer at the end of the month.

Although this might sound reasonable in an emergency, the charges can spiral if you cannot pay the money back when it's due. If you fail to pay it back on payday the firms add on another £25 charge per £100, which would equate to £31.25 (£25 per £100 of a £125 debt). Fail to pay back any of the £100 loan for, say, six months, and you will be looking at having to repay nearly £400 and almost £1,400 if you don't make any payments for a year.

Payday UK openly admits that this equates to an APR of 1,355% but says the APR is a false measure as it is intended that you repay the cash over a month, rather than a year. The companies behind the ads - such as MEM Consumer Finance - also claim the loans work out cheaper than bounced cheques or unauthorised overdrafts.

When a payday loan might make sense

In some cases this can prove correct - and used with caution payday loans can help people out of short term problems. Mike Brookes is a typical example. He got himself a bad credit rating as a student and, three years later, an error at the bank forced him to go seriously overdrawn. With few other options open to him he took out a payday loan from Payday UK to see him through Christmas.