There have been growing concerns recently with regard to the significant growth in pay day loan companies and other organisations offering expensive, small, short term loans to individuals at particularly high interest rates.

Both the government and consumer groups are concerned about the situation, following a new report from the Department for Work and Pensions (DWP) which highlights that many individuals in the low earnings categories are paying a “poverty premium” for their loans and other credit.

Many of these individuals are unable to obtain a loan from a traditional high street bank or other loan company and as a result, many are pushed towards pay day loan companies, or even a loan shark as an alternative source for the finance they need.

The report from the DWP has suggested that credit unions are ideally placed to offer a serious alternative to pay day loans for many lower earning individuals, giving them the opportunity to access a cheap loan alternative to their current expensive credit and loan options.

However, to provide a realistic service to consumers, credit unions need to change, expand and develop in order to bring themselves up to date and offer a realistic loan solution for millions of people.

The DWP has predicted that it will take between seven and ten years to bring credit unions to the level where they are able to provide a full and comprehensive cheap loan service to those who need it the most.

Lord Freud, the Welfare Reform Minister said “Currently around seven million people fall into the trap of high cost credit, with some being charged more than 6,000 per cent in interest on short term loans.”

“For too long predatory lenders have been plaguing the homes of vulnerable people, who often have no other way to get cash when they need it most.”

The effects of the credit crunch and banking crisis had a significant impact on the average consumer in the UK, acting as a wake up call for many to make efforts to sort out their finances and pay of their outstanding personal loan and credit card debts.

As a result of this, the average level of unsecured credit on things like personal loans and credit cards had continued to fall steadily from January 2010, right up to the end of last year, as people took advantage of their cheap loan rates on their home owner loan, in order to repay more expensive loan and card debts quickly.

However, the latest figures from the debt charity Credit Action, have revealed that this trend has reversed since the beginning of this year, with the average level of unsecured loan and card debt increasing by £34 in January this year and a further £19 in March, although the average figures did drop slightly during February.

The average amount of household debt in the UK on unsecured loans and other consumer credit debt, but not including home owner loan debt, now stands at £7,903. If home owner loan and mortgage figures are included, this figure increases to around £55,436.

The overall level of outstanding unsecured loan and credit card debt in the UK stood at £1,458 trillion in March and looks set to continue increasing.

Michelle Highman of Credit Action said “Based on the figures for the first three month of the year, it certainly seems as though the burden of consumer credit and loan debt has started to increase. Whilst debt isn’t necessarily a bad thing in itself, it can quickly become a very serious problem if you’re unable to pay it back.”

“That’s why it’s absolutely crucial for consumers to be on top of their money, particularly given the fact that we’re now in a double dip recession.”

Last week we reported on how Sainsbury’s Bank had reduced their interest rates on their unsecured personal loans of between £7,500 and £15,000, giving the bank the cheapest loan rate on the market at the moment, as the battle of the cheap loan providers continues among a few unsecured loan providers.

This week, Sainsbury’s has announced that it is to introduce a price promise guarantee on its personal loans, across the whole range of unsecured loans from £1,000 up to £25,000.

The personal loan price promise guarantee means that if a customer is accepted for a personal loan with Sainsbury’s Bank and that customer is then able to obtain the equivalent loan from an alternative provider at a cheaper loan rate, Sainsbury’s will guarantee to lower their own loan rate to beat the new deal.

The offer is available to those customers who have already successfully applied for a personal loan with Sainsbury’s on their standard loan product. Any claim for a cheaper loan deal must be made within 28 days of the original loan offer and before the acceptance forms have been returned for the Sainsbury’s loan agreement.

If a customer is able to find a cheaper loan deal with an alternative lender and the claim is accepted, then Sainsbury’s will reduce the rate on their own loan to 0.1 per cent lower than that of the alternative provider. The alternative cheap loan must be on a like for like basis as the Sainsbury’s loan.

Steven Baillie of Sainsbury’s loans said “We are constantly looking for ways to reward our customers. Those customers who secure a personal loan from us can rest assured that they will be offered one of the best rates on the market. But if they can secure a better deal elsewhere we now promise to beat it. We believe there are no other loan providers to make a commitment quite like ours.”

Despite the fact that many banks and building societies are planning to increase the standard variable rate on their existing and new home owner loan products, in other sectors of the loan market the exact opposite seems to be the case, with loan rates getting cheaper.

There has been a battle raging for several months now between a number of unsecured loan providers, to see who is able to offer the best cheap loan deal and although this has gone fairly quiet over the course of the past couple of months or so, it looks as though the pace could be picking up once again.

Sainsbury’s bank has just announced this week that it is reducing the interest rate on unsecured loans of between £7,500 and 15,000 over a one to three year term, to just 5.9 per cent. This is now officially the lowest loan rate on the unsecured loan market at the moment and the first time unsecured loan rates have fallen below 6.0 per cent since September 2007.

The average rate for the top ten unsecured loan deals of this size is now 6.27 per cent, which is the lowest since May 2007, according to research from Moneysupermarket.com, when the rate was then 6.28 per cent.

This new cheap loan rate is only available to those borrowers with an excellent credit rating and the actual rate payable is determined by individual circumstances, although this new low loan rate is likely to prompt other lenders into taking similar action with their loan deals.

Tim Moss of Moneysupermarket.com said “There is no doubt that the credit crunch has had a significant impact on the personal loans market. Although there has been healthy competition over the past two years, this loan rate reduction by Sainsbury’s Bank is a real landmark, there hasn’t been a rate below 6.0 per cent since the financial crisis began.”

There has been a lot of bad press aimed at the pay day loan industry and pay day loan firms in particular in recent months, with many horror stories about the high rates of interest on these short term loans and the unfair treatment of customers who take out this type of loan.

However, the Consumer Finance Association (CFA) the trade body who represents pay day loan companies, has hit back at critics of pay day loans and the government in particular, saying that politicians have given this sector of the personal loan industry a bad press, due to a misunderstanding of how pay day loans actually work.

The CFA recently carried out a survey amongst Pay Day Loan customers and the results showed that more than nine out of ten loan customers thought they had received good value for money and that their pay day loan lender had treat them with dignity and respect.

Pay day loan companies often charge around 25 per cent of the loan amount in fees, although these charges can spiral out of control if the loan is not repaid on time or any repayments are missed or late.

Despite this, 89 per cent of pay day loan customers in the survey said that they had had the charges explained to them clearly by the loan company before they took out the loan and were happy with the service they received from the lender.

John Lamidey, Chief Executive of the CFA said “pay day loans can be misunderstood by politicians concerned for the welfare of constituents in tough economic times.”

“This research shows that the people who actually use pay day loans are extremely satisfied with them at every level.”