There has been a growing concern recently about the increasing number of companies offering “Pay Day Loans”, with particular reference to the marketing and advertising policies adopted by many of these companies.

A Pay Day Loan is, in effect, a cash advance on an individuals salary or wage, prior to their normal pay day, to see them through until their salary clears. The loan is then repaid from the salary cheque. Most of the companies offering Pay Day loans will typically charge around 25% interest on the debt over the short period of the loan and advance up to an amount of around £750. As an example, if you were to borrow £500, you could expect to pay back £650 by the end of the month. If the payment is not made in time, you will be charged again. If the loan is not repaid for a full year, this could equate to an APR (annual percentage rate) of up to 1,355%!

A consumer charity has warned about the advertising used by many of these companies, which does not reveal the true cost of the credit being taken and has raised the issue with the Office of Fair Trading (OFT), calling for an investigation. Many of these companies are targeting younger people via social networking sites such as “Facebook”, without adequate warnings in their adverts as required by the OFT.

Companies which offer Pay Day loans are defending the cost of the loans and the marketing policies, claiming that it is intended as an extremely short term loan and that APR, which is traditionally used to demonstrate true cost, is not appropriate in this case.

Pay Day loans can be beneficial in certain circumstances, but should be used with extreme caution. This type of loan is clearly intended as a short term measure, and should only really be considered as a last resort.