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We’ve all heard that old saying that “there’s too much month for the money”, well it seems as though this phrase has never been more relevant, as a growing number of people living in the UK are starting to depend on short term, expensive Payday loans.

Payday loans have been around for many years and are short term loans, usually for a term of less than a month and for small amounts of borrowing, in most cases no more than a few hundred pounds at any one time.

Payday loans are available from a number of sources, such as doorstep lenders, pawn brokers and online loan companies and are designed to provide an extra bit of cash for those individuals who have either overspent, or under budgeted for the month and have run short of money before their next salary cheque is due.

Whilst this type of unsecured loan can be particularly useful and beneficial for those who need extra cash for essentials to see them through to the end of the month, it seems that there is a growing dependence on payday loans, which is beginning to worry finance industry experts, as the number of loans being taken out has increased dramatically over the past few years.

The effects of the credit crunch and recent banking crisis are still having their impact on the UK economy and banks and other traditional lenders are extremely cautious about offering loans to anyone other than those with a perfect credit history, with the inevitable result that a large percentage of the UK population are left in the situation where they are unable to obtain an unsecured loan through a traditional route.

This is causing individuals to turn to more expensive forms of borrowing money, such as payday loans, log book loans, pawn brokers, doorstep lenders and in extreme cases, illegal loan sharks.

Whilst most of these types of loans, other than loan sharks, offer a valuable and in many cases necessary service to a certain type of client who can not obtain a loan elsewhere, there are growing concerns that too many individuals are becoming too dependant on such borrowing.

A new report, published by Consumer Focus,  has revealed that the number of payday loans being take out has grown by more than four times over the course of the past four years, with somewhere in the region of 1.2 million individuals taking out loans for a total of £1.2 billion over this period.

Although payday loans are an extremely expensive way to borrow money, often having an APR (Annual Percentage Rate) of anywhere between 1000 and 2000 per cent, the impact of this cost is usually minimised by the short term of the loan. Having said that, the typical cost of such a loan is normally between £13 and £18 for every £100 borrowed, but can be as much as £30 per £100 of loan, with more expensive providers.

The real concerns arise when a borrower is unable to repay the loan once they receive their pay cheque and they are often hit with late payment penalties and spiralling interest costs as the charges and rolled up interest start to add up.

An average payday loan of £300 would normally cost somewhere in the region of a total of £360, if it was fully repaid with a month of taking it out. However, if repayment is missed and interest starts to add up, the loan could end up costing around £660 to repay after just six months.

The United States have had their equivalent of payday loans for considerably longer than the UK and there are great concerns over the amount of debt being accrued by some individuals who keep taking them out and never repaying the total amount. This has led to the position where payday loans have actually been banned altogether in certain states.

Consumer Focus, who conducted the survey in the UK are concerned at the rate of growth and popularity of payday loans, as borrowers become more desperate for money and predict that the industry could grow by as much as another 45 per cent in just a short period of time.

The typical borrower who takes out a payday loan is often single, under the age of 35 and earning less than £25,000 per annum. The majority of these people are not likely to be concerned over the interest rate being charged on their loan, just in the fact that they have some cash in their pocket to buy groceries with, or go for a night out with their mates!

Consumer Focus are concerned that at the moment there are no rules governing the use and sale of payday loans and vulnerable individuals can get in to financial trouble extremely quickly if they are not careful. As a result of this, they are calling for a review into payday loans with the intention of introducing new legislation to regulate such loans.

Consumer Focus acknowledge the fact that payday loans play an  important role in the finances of many borrowers and therefore do not wish to have them banned altogether, as this would encourage more people to turn to illegal loan sharks for their loans.

The new proposals are that payday loan providers take a more responsible attitude towards offering loans to individuals, in order to help their customers getting into unmanageable loan debt.

Consumer focus is proposing the following measures:

Borrowers should be limited to a maximum of five payday loans in any twelve month period and if five such loans have all been rolled up into one consolidation loan, the borrower should be refused any further credit and referred to an independent debt adviser.

Payday loan companies should carry out more detailed financial checks on potential borrowers before offering a loan and different loan companies should share information through a common data base in order to stop borrowers taking more than one loan out at any one time with a number of different lenders.

The main high street banks in the UK should help out by offering a realistic alternative to payday loans through offering more traditional short term cheap loans.

The use of social lending organisations, such as credit unions, should be encouraged and developed by the government and the financial services industry.

Marie Burton of Consumer Focus said “With the recent credit crunch, demand for short term borrowing has significantly increased despite the eye watering interest rates charged by some payday lenders. Such expensive rates can leave consumers who defer payments, or take out repeat loans, caught in a debt trap.”

“These products are controversial, but we don’t agree with calls for them to be banned. Outlawing payday loans could leave some borrowers vulnerable to illegal loan sharks.”

“Instead we need sensible safeguards now to stop borrowers becoming dependant on this high cost credit and prevent even more stringent controls being needed in the future. We also need banks to provide alternative short term credit to suit the needs of cash strapped consumers.”