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.
ExpensiveThe 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.
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 habitsThe 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 concernsThe 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.
SecurityAnd 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?