Last week the Competition and Markets Authority (CMA) announced a series of proposals to drive down the costs and improve the transparency of charges for payday loans customers.
The plans include forcing lenders to provide details of their products on accredited comparison websites thus making it easier for new entrants to compete.
It is hoped that this will be a big improvement on the current situation whereby the lenders with the biggest marketing budgets win most business by targeting consumers with daytime TV advertising.
These moves are welcome and are expected to save the estimated 1.8 million payday loan borrowers in the UK around £60 per year.
Money expert Andrew Hagger said: “more still needs to be done to make consumers with an imperfect credit record aware that a payday loan may not be the only option available to them.”
“For example there are a number of specialist credit cards on the market designed to help people repair their credit record by proving they can manage and repay their card balance.”
The main players in this market are Aqua, Luma, Vanquis and more recently Tesco Bank with its Foundation Credit Card.
Hagger added; “The interest rates charged on these ‘non prime’ credit cards range from 28.9% APR to 49.9% APR, a step up from the rates charged for mainstream plastic, but still way cheaper than going down the payday loan route.”
“To put the cost difference into perspective, if you borrowed £400 for 1 month on a card at 39.9% APR and didn’t pay the balance in full when the statement arrives, your interest charge would be £13.55 (or 44 pence per day). Borrow £400 from Wonga for 31 days and you’ll be charged an extra £131.21 – that’s an equivalent of £4.23 per day.”