Pay day Loan 's high interest rate ?? It's not an automatic red card

Astronomical rates don't always mean a bad deal. An unarranged overdraft could cost £60 when a Payday Loan through Heart Finance would charge £19.00, for example.

Pay Day Loans from Company like Wonga, short-term loan business, claimed last week that it was more transparent than the banks, after the Independent Commission on Banking (ICB) said customers were confused by the welter of charges associated with their current accounts.

Errol Damelin, the founder of the company, said customers could not compare the cost of borrowing money in the short term when the most common way of doing it was through a bank overdraft.

keeping the example of Wonga, they are forced to display a representative annual percentage rate (APR) for its loans of 4,214pc. (But there are many other Payday Lenders who can be much cheaper still ) However, Mr Damelin said that, because it offered loans limited to 30 days, the APR was not relevant, and the loan was often cheaper than unauthorised bank charges for the same amount.

"There is a place for an APR, but we don't offer a loan that rolls up for a year so you are comparing an impossible product," he said. "Also, it is not used by the banks so customers cannot compare in a normative way."

Sir John Vickers' final report for the ICB said one of the reasons for a lack of competition in the banking industry was that many customers were not aware of their banking costs, and did not have ready access to the information required to compare alternative offers.

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It warned that there were no effective price comparison services for current accounts. It added that some experts believed companies "design complex tariffs and pricing structures to decrease the ability of consumers to compare prices".

Mr Damelin said complex overdraft charges and structures meant that the majority of bank customers "never understand what they are going to pay" when they go overdrawn.

In some cases, despite in this case  Wonga's expensive 4,214pc APR, ( or even lower rates from other lenders) it can be cheaper to take out a short-term loan. For example, if you have an Everyday Current Account with Santander and become overdrawn it can cost you dearly. If you go into your unarranged overdraft and are overdrawn for two days in a row, and two payments come out of your account in that time, it will cost you £60. If you borrowed £100 from Wonga for 15 days to avoid slipping into overdraft, you would be charged £21.11. ( from some other lenders it would be in the region of £19)  If you borrowed that money for two days, it would cost you £7.50.

Mr Damelin said customers needed to be able to compare the two types of product in order to make a decision, a comment echoed by Sir John's report. The report said price comparison sites did not really work for bank accounts, and consumers did not know whether they could get a better deal elsewhere.

Mr Damelin said there needed to be more competition in banking in order to meet customers' needs, saying that the Government was not encouraging new entrants into the banking market.

Wonga's own model is based on a complex algorithm and credit checking process, rather than a human assessment of payslips and address details, as with many payday loan companies. Each loan application is assessed entirely by a computer.

Wonga, which sponsors Blackpool Football Club, is keen to avoid the sobriquet of "payday loan company", and says its borrowers are not vulnerable customers who struggle to pay back the money that they have been lent. Instead, it describes them as mainly tech-savvy young professionals. Less than a quarter of the company's customers have previously used an equivalent online or short-term loan product before coming to Wonga. Instead, they're coming from the banks and traditional credit products.

Every single Wonga customer has a bank account, debit card, internet access and a mobile phone. The company's loans of up to £400 are available for one day to a month, and interest is charged at 1pc a day. The vast majority of customers can access other forms of traditional credit, such as loans and credit cards. For many, Wonga is an alternative to a long personal loan that they could not pay back early because of repayment penalties, or an overdraft fee.

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 by the Telegraph