A payday loan can leave you out of pocket

Enter payday loans, that allow anyone, no matter what their credit history, to borrow a few hundred pounds on a short-term basis — for a hefty fee. Payday loans companies have enticed many with promises of "£750 Wired to Your Bank in One Hour. Instant Approval Within Seconds!" that last year they accounted for £1.2 billion of borrowing.

It's easy to see why. The latest figures show interest rates on overdrafts have hit 19.1 per cent, with banks withdrawing their best overdraft deals. A click on moneysupermarket.com will show you a list of four companies, each of which will lend £100 for 31 days. A month later, you pay back £125. The £25 charge means you're paying 1,286.1 per cent APR. Compare that to some of the least favourable rates of 17.9 per cent APR on a personal loan or the 19.9 per cent APR on a credit card (7.7 per cent and 16.6 per cent on some of the most favourable) listed on the same comparison site and you see the problem. Yet despite the figures, the trend has boomed.

"Debt is rising and the banks are being tighter on who they will lend to," says Ed Bowsher, head of consumer finance at money-management website Lovemoney.com. "People sign up to payday loans because you can get money into your bank account in a matter of hours. Just about anybody can get them.

"Although the idea is that you're only taking out money for two weeks, people then can't always pay that money back and the debt mounts."

For Stephanie Derby, from Finsbury Park, it's an all-too-familiar story. "I'd just graduated and my debts were mounting," she says. "I borrowed £400, hoping to pay it back a few weeks later, but I was unable to. Each month it cost another £56 to renew the loan and after six months the initial loan of £400 ended up costing me nearly £800."

But for many reaching the end of the month with direct debits pending and no money to pay them, the £25 charge on £100 will seem better than the £30 fee (reducing to £15 in November)Nationwide currently levies for each unpaid direct debit, standing order or regular transfer. It will seem even more attractive compared with the daily £20 charge Lloyds TSB charges (up to a maximum of 10 daily charges) for exceeding an overdraft limit by £100-plus.

Bowsher and Lovemoney.com say: "Our advice is to steer clear. Talk to a debt-advice charity such as the National Debtline, which can help you with a debt management plan."