Alarming new twist on payday loans

Golden coins on black background. Macro shot.

A payday loans company has come up with a worrying new development. These high interest loans from a firm called ClearAccount are being marketed as a 'financial safety net', which can automatically lend you money when your current account is running low. The company claims it will help avoid overdraft charges.

But there are four reasons for alarm.
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Expensive

The first is that the product could end up costing a small fortune. It can work as a normal high-interest short-term loan, which you request on a one-off basis, and then repay when you have the funds.

However, there's also a facility which lets you turn on 'automatic deposits', which means the company will monitor your current account, and then when it drops below a particular level, it will automatically lend you money – at 430% - which works out as 1% a day – or £1 a day if you borrow £100.

The company claims that it helps you avoid expensive overdraft charges. Certainly this will be a better deal than going into an unauthorised overdraft, but that's not saying much because an unauthorised overdraft costs an average of £37 a week in fees and charges.

And it's worth pointing out that it's not necessarily cheaper than an authorised overdraft - because some cost far less than these loans.

In any case it's a spurious claim, just because something is cheaper than one of the worst possible ways to borrow, it doesn't make it a sensible option.

If you have no alternative other than to borrow, the best answer is to borrow for as short a time as possible, as cheaply as possible, and then pay it back as quickly as possible. This may mean using an interest-free credit card or a low interest loan.

But the real answer is that we should all have an emergency safety net of savings to protect us. We need to have the discipline not to have to borrow in any normal month, and have a cushion for the expensive months. Its not something we can build up overnight, but it's something that can be done with determination.

Bad habits

The second concern is that these loans are likely to encourage a poor attitude to borrowing, and bad habits. The automatic nature of the loans takes away the mental barrier of having to apply for a loan - so people will fall into the trap of considering the loan as part of their everyday budget.

When use becomes habitual, the costs will start to mount dramatically - which will exacerbate the problems people have in sticking to their budget.

Repayment concerns

The third problem with this product is that the company says it will take repayments automatically from your bank account when you have enough money in there. Even if you don't have quite enough, it will take a part payment – which could then trigger the need for another loan. Those people who are already in financial distress will suddenly see cash disappear from their account with no control.

Security

And the final question is one of security, which was raised by an article in the Times. Given that you have to hand over your banking password and PIN when you take one of these loans, there is always the worry that this information could go astray.

The company says that they don't see the details. They're encrypted and managed by a company called Yodlee which is regulated by the US authorities and used by UK banks.

But what do you think? Would you use a loan like this?

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Alarming new twist on payday loans
Once you have opened a current account with a bank or other lender, you will get a steady flow of emails, letters (and maybe phone calls) offering you a savings account, loan, mortgage, ISA etc to go with it. But while it may be tempting to have everything in one place, it's better to do the legwork and shop around for the best financial products. You can compare interest rates on loans and savings accounts in the 'best buy' tables in the newspapers, or look online on comparison sites. Remember you can still easily transfer your money between accounts, even if they are not with the same financial institution. 
Whether you want to apply for a new mortgage or refinance an existing one, your bank will probably be very happy to give you an instant quote in the hope that you will go with them. They may not tell you that you can shop around at other lenders. A mortgage broker can give you an overview of the best interest rates on offer, and might be able to cut you an even better deal him/herself. 

Want to cash in your jars of change that are sitting on your shelves at home? Many banks are not very keen on coins. They often only take it from their own customers. You will have to sort it into different denominations and put the coins in the bank's bags in set amounts (for example, £1 for coppers, £5 for silver, etc). Some banks only take a limited number of bags a day, or won't take any at busy times. Others take a different view: HSBC has free coin deposit machines in many larger branches where you pour your jar of coins into the machine and it counts them and automatically credits your account. Barclays, NatWest and RBS also have machines in large branches in city centres.

Bank employees now have a duty to point out that they only advise on the bank's products and don't offer independent financial advice. What they won't tell you is that even the advice they give you about the bank's own products should be treated cautiously. Bank staff are often undertrained, underpaid and overworked. (You could ask for the employee's qualifications before getting advice.) So do your own research and/or find an independent financial adviser.

Nothing is set in stone. Your bank won't tell you this, but sometimes it will waive a fee, for example an overdraft or an ATM fee, depending on the circumstances. You have nothing to lose by asking, if you can argue persuasively why they should waive the fee. Citizens Advice says your bank should treat you sympathetically if you can show financial hardship.

As stated in the previous slide, some things are negotiable – such as interest rates or waiving fees – if you can make a good case for it. In that instance, talking to an employee in person is better than filling in a form online.

If your account is overdrawn and you get paid, your bank could use this money to pay off your overdraft without your permission. However, you have a right to ask them not to do this so you can pay your rent or mortgage first. This is called first right of appropriation. You have to ask your bank in writing, and you'll need to write to them with new instructions every time money gets paid into your account. Make sure you write 'first right of appropriation' in your letter.

If money is mistakenly credited to your account, your bank or building society can recover the money, assuming they do this within a reasonable time. But you may be allowed to keep the money, for example if you didn't realise the bank had made a mistake and spent the money in good faith. You would have to prove that you spent it in such a way that it would be unfair to ask you to pay it back. You can complain to the Financial Ombudsman if you think your lender is being unfair in asking you to repay the money.


If you do have to pay it back, you could try to reach an agreement with your bank to pay it back in instalments without interest being added.

The Financial Ombudsman Service has more advice on what happens when payments have been credited to the wrong account. If you did something wrong - for example, by entering the wrong account number - rather than the bank, the Financial Ombudsman may still uphold your complaint. They consider whether the financial institution made it clear to the consumer that only the bank sort code and account number are used to process the payment, rather than the name of the payee. They will also ask whether the lender should have realised that the consumer had made mistake, and once the problem came to light, did the firm take reasonable steps to try to get the money back from the recipient.

If too much is deducted from your account, your lender may have to refund the full amount of the payment. For example, if the money is taken through a direct debit or credit card payment for a hotel room or car rental. When deciding whether the debit was reasonable, the bank or building society will take into account your previous spending pattern. But the bank doesn't have to refund the payment if you agreed the amount beforehand or were informed of the payment by your lender at least four weeks before.

If you don't have enough money in your account to cover a direct debit payment, your bank may not make the payment. It doesn't have to tell you that the payment hasn't been made, so the onus is on you to keep checking your account. If, on the other hand, the payment goes through, you may be charged for an unauthorised overdraft.

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