High-interest loan deals double as rising cost of living takes toll

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The number of people resorting to expensive loans to tide them over until they are paid has more than doubled during the past nine months, figures showed today.

There was a 130per cent increase in the number of payday loans taken out during May compared with August last year, according to figures from moneysupermarket.com.

The increased uptake of the loans, which typically charge interest of more than 1,000per cent, is the latest sign that consumers are buckling under the strain of higher mortgage repayments, food and energy prices.

Tim Moss, head of loans at moneysupermarket.com, said: 'The rise in payday loans is astronomical and shows just how difficult people are finding it to cope day to day.

'As disposable income is being squeezed through increases in the cost of food, fuel, utilities and general living necessities, these loans are increasingly used to help those on a tight budget.'

Payday loans, which are offered by groups such as Payday UK, Payday Express and Redhouse Financial, lend people sums of up to £1,000 on a short-term basis, usually to tide them over to the end of the month when they receive their pay cheque.

But the loans come with steep interest rates, with groups typically charging people £125 to borrow £100, providing they repay their debt within 31 days, giving an annual percentage rate (APR) of just over 1,286per cent.

The loans tend to be used by people on low incomes who do not have the option of borrowing money elsewhere, such as through an overdraft or credit cards which charge interest of a fraction of that demand on payday loans.

Credit card typically charge rates of around 16per cent APR and authorised overdrafts charge less than 20per cent on an APR basis.

Mr Moss said: 'Payday loans should only be taken out when it's absolutely necessary and you are sure you can pay it back quickly.

'Anyone looking for longer-term credit or unable to pay off the debt immediately, should steer clear of them.

'It would be wiser to borrow the cash from family or friends or arrange an authorised overdraft with your bank.'