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Payday loans 'service' aimed at children launches | Moneywise News

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A payday loans service for children called Pocket Money Loans has launched, targeting kids aged 3+ with loans of up to £20.

The loans come with an APR of 5,000% and are available instantly online. Borrowers can choose to repay their loan in as little as a day or can take as long as 60 days.

The website for the firm carries branding aimed at children, including a yellow cartoon coin which the company hopes will attract young borrowers.

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A work of satire

But the loans firm is, of course a “work of satire” from artist Darren Cullen, aimed at drawing attention to “the way the consumer credit industry preys on the vulnerable and targets children with marketing.”

“Almost all payday loan companies have cartoon mascots, animated characters or sing-along jingles in their adverts,” Cullen explains. “Their high street shops often have play areas full of toys and some of them hand out balloons and sweets to kids at the counter.

“It’s a clear fact they target children, as both a means of persuading their parents, but also as a way to groom the next generation of indebted customers.”

Pocketmoneyloans.com appears, at first glance, to be a legitimate service because Cullen has used terminology that mirrors that of recognisable payday lenders.

On the home page, consumers are told: “Getting a pocket money advance from Pocket Money Loans is easy-peasy!” It also states: “Money problems? Get out of debt with a loan.”

Dig a little deeper, however, and the joke becomes more obvious: “We will look at how much your pocket money is before deciding on how much to offer you as a loan. Usually we will loan you just a little bit more than you can afford to repay.” The website also states: “APR stands for Annual Percentage Rate and it’s really confusing and boring.”

Cullen – who produces art, illustration and comics at spellingmistakescostlives.com – is opening a pop-up installation at the Atom Gallery in Finsbury Park to showcase his Pocket Money Loans idea to the public.

He adds: “Payday loan customers who repay on time are in the minority and they offer the smallest profit margin to the company. It’s the people who can’t afford to repay on time who rack up charges and compound interest over weeks or months. That’s where the real profits lie, built upon the backs of the poorest, most vulnerable members of society.”

Payday loans

Short-term cash loans designed to be borrowed mid-way through the month to tide the borrower over until they next get paid, whereupon the loan is settled. Generally used by people with bad credit ratings and/or no access to short-term credit such as an overdraft or credit card. Like logbook loans, this type of borrowing is hugely expensive: the average APR on payday loans is well over 1,000% and in some instances can be considerably more.

Compound interest

This is effectively paying interest on interest. Interest is calculated not only on the initial sum borrowed (principal) or saved (see APR and AER) but also on the accumulated interest. The more frequently interest is added to the principal, the faster the principal grows and the higher the compound interest will be. Compound interest differs from “simple interest” in that simple interest is calculated solely as a percentage of the principal sum.

APR

This is used to compare interest rates for borrowing. It is the total (or “gross”) interest you’ll pay over the life of a loan, including charges and fees. For credit cards where interest is charged at more frequent intervals, the APR includes a “compounding” effect (paying interest on interest). So for a credit card charging 2% interest a month (equating to 24% a year), the APR would actually be 26.82%.

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Are payday loans really the answer to help us out of our debt – Metro

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They aggressively target young people with adverts and marketing: fluffy characters and social media campaigns that treat you as though you’re their best mate.

But while payday lenders offer cash that’s quick, it’s not cheap – and when you can’t pay up, the dialogue becomes much less friendly.

For some people already struggling with their finances, the lure of the payday loan can be all too much.

Thousands of people have been sucked into a debt spiral, many taking out multiple payday loans to clear the balance on the first.

Last week, the Office of Fair Trading (OFT) opened formal investigations into several payday lenders over aggressive debt collection practices and a lack of checks as to whether borrowers can actually afford to take out the credit in the first place.

But do the short term loans, which quote APRs of more than 4,000 per cent, have a place in the industry?

Debt charity StepChange saw more than 2,000 people in the first six months of this year struggling to cope with five or more payday loans – three times the number seen for the whole of 2009.

One couple were crippled by debt after taking out 36 payday loans, which raises the question about whether rigorous credit checks were conducted at all.

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At the beginning of this week, a new voluntary code of practice for the entire payday lending industry was released.

Lenders who belong to trade associations have signed up to a maximum limit of three rollovers on any loan; 30 days breathing space for customers who need to get their financial affairs in order and the immediate freezing of interest for anyone in financial hardship.

But the OFT says lenders comply better when actual regulations are in place, so now it’s a case of standing back and waiting to see if a self-imposed voluntary code works.

‘If the lenders don’t adhere to the new voluntary codes of practice and if the trade bodies don’t enforce them, then there is a clear-cut case for greater regulation,’ said Peter Tutton, head of policy at StepChange.

‘It is up to the OFT to make it clear to lenders that it will take action if they fail to meet their new obligations.’

Another problem is recurring payments. Many consumers find they are caught in a debt trap after giving permission to take continuous repayments from their account.

Known as CPAs, they work like a direct debits, but can be extremely difficult to cancel and if companies decide to take more than the agreed amount, they can, without warning.

Russell Hamblin-Boone, chief executive of the Consumer Finance Association (CFA), which represents 70 per cent of the payday loan industry, said they are looking at how to change the rules to help people who can no longer keep up with the continuous payments.

He believes changes in the economy have led to such a strong market for short-term finance.

‘The growing demand is largely down to the fact that, in an uncertain economy, consumers are increasingly choosing payday loans over mainstream credit options.

‘This is especially true of the young, who are used to instant transactions online, have only ever experienced limited credit options during the post-credit crunch era and are dealing with uncertain employment prospects. For them a payday loan suits their needs exactly.’

But what about those nasty APRs? It’s a legal obligation to display the annual figures in order to make comparisons with, say, a credit card.

However, where short term loans are concerned, the compound interest calculations and scary percentages don’t really mean much.

Wonga says the figure is misleading because its loans are offered at one per cent per day for a maximum of 30 days – not the 4,214 per cent displayed on its website.

For a first-time customer, borrowing £176 for 16 days costs £34.14. After 60 days, if the customer has not paid back or contacted Wonga, the loan is frozen automatically.

But not all lenders follow the same practices.

‘If you asked for £20 and I said pay me back next week and buy me a pint, assuming the pint was £3, most people would find that reasonable – but the APR is 141,000 per cent,’ said Martin Lewis, founder of MoneySavingExpert.com.

‘So the APRs aren’t an accurate measure, but the point is people take these loans out and are then actively encouraged not to pay back, or to roll them over. Because there are very few credit checks you can simply go to another company to take out another loan. So the more you keep doing that, the more realistic those APRs become.

‘If that’s happening it goes from being something quite distasteful to something extremely unmanageable.

‘I would say avoid them with a barge pole and only in specific circumstances where you know you can pay back within a couple of weeks would I touch them – not if it’s going to take months.’

While regulation of the industry is still up in the air, ever-increasing pressures on disposable income indicate demand for these loans is not going to diminish any time soon.

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