Lender offering tempting 0% payday loan

A payday loan with a zero-interest introductory offer has been launched. But is this deal anything more than a clever marketing gimmick?

Payday loans have attracted derision from many quarters on account of their astronomical interest rates. Yet a new version, launching today, claims to offer the loans absolutely interest-free, for the first eight days.

But could this 0% payday loan really have a legitimate role in anyone’s finances? Or is it just a cynical attempt to trap people into high interest credit?

0% period

The loan, offered by short-term lender InstantLoansDirect.com, is free of interest for eight days. After this the company charges 50p per day for every £100 borrowed until the loan is fully repaid.

This equates to 448.3% APR; relatively cheap for payday lenders, many of whose rates can stretch to 4,000%. New borrowers can apply for loans of between £50 and £300. This upper limit is extended to £750 for existing responsible borrowers.

The interest-free period lasts until 23.59 on the eighth day after the loan is taken. If the full sum is not repaid by this point then the 50p per day per £100 charge is levied retrospectively for the past eight days, and for any following days that a balance is outstanding.

The loans are available for the last eight days of each month, starting on 23rd November. Borrowers must be no less than 18-years-old, employed and earning at least £750 a month and have a valid bank account and debit card.

Repaying the loan

The loan is repaid on a date set by the borrower when they apply for the loan. This is usually the customer’s payday however the date can be pushed back by contacting InstantLoansDirect.com at least 24 hours prior to the repayment date.

If funds are not available and a payment defaults, InstantLoansDirect.com will try to contact you about the failure and attempt repayment again.

In its terms and conditions the lender states that it “may try to take payment at seven day intervals [after the initial repayment date] for all or 50% of the amount outstanding to a maximum of two attempts per day”.

If a customer has no funds in their account, these attempts could trigger default or returned item fees which are usually between £10 and £20 per transaction. So while InstantLoansDirect.com only levies a 50p per day fee on every £100 outstanding, the bank-applied charges for any attempted payments could still force borrowers further into debt.

Emma Bryn-Jones from the consumer rights co-op Zero-Credit said short-term loan defaults could be a particular problem for stretched festive shoppers. “It’s likely to cause a lot of tears among borrowers expecting Christmas bonus pay like last year that does not materialise,” she said.

However, Giles Coutts, founder of InstantLoansDirect.com said that defaults were very rare and that only around 2% of the site’s customers were unable to repay their loan on the set date.

On the subject of the daily 50p per £100 charge Mr Coutts said: “It’s like me lending you £100 and you buying me a coffee or a pint to say thank you.”

But not everyone sees it this way.

Cynical trap

The InstantLoansDirect.com 0% promotion has been criticized by many debt charities. Matt Hartley of Consumer Credit Counselling Service (CCCS) called the product a “cynical attempt to trap people into paying extremely high interest rates.”

We frequently criticize payday loans here at lovemoney.com for their dangerous tendency to quickly spiral out of control, pushing the financially vulnerable further and further into serious debt. And while this new loan does come with a 0% period, you’ll be hit with the same ballooning charges if you can’t meet the eight-day deadline.

Taking out a payday loan is also a clear sign that something is not working within your finances.

Many people will take out a payday loan as a ‘one off’. And this is fine, providing you don’t return to the lender in the following months – which many subsequently do. In other words, it’s a painkiller, not a fix. You’re far better off getting in touch with a free debt charity such as CCCS or Citizens Advice and fixing your finances once and for all.

That said, there are worse ways to borrow.

Overdraft fees

As we reported last year, some overdrafts are now even pricier than payday loans. Many banks now even charge a flat fee for overdrafts as well as an expensive EAR interest rate. These charges can quickly spiral, pushing the already indebted further and further into the red.

Obviously spending eight days owing a 0% payday loan that you are sure you can repay is a better option than eight days in an expensive overdraft.

But overdrafts aren’t always bad.

Accounts with interest free buffers can be useful ways to plug a funding gap for free before payday. Santander’s Preferred Account comes with a fully interest-free overdraft. However this buffer only lasts for 12 months and you will have to pay £1,000 into your account each month – making it an unsuitable for many prospective payday borrowers.

Credit checks

If you’re even thinking of turning to a payday loan, chances are it’s because other mainstream credit avenues – be it overdrafts or credit cards – are out of reach. This could be because of a poor credit history or low income.

Basic bank accounts were developed precisely for this financially vulnerable section of society. However, these deals never come with overdrafts.

The Co-operative Bank Current Account Plus could be the most practical bet if you’re after an interest-free buffer but have a sketchy financial record. The account has a fee-free £200 overdraft but requires £800 to be paid in for the first three months. That’s only £50 more than the funding requirements for InstantLoansDirect.com.

But even if you meet these income requirements, you won’t definitely get the account, as applications will also be subject to a credit check. You can check out your own credit record with a free trial from Experian, via lovemoney.com.

Your take

What’s your opinion on this new payday loan? Would you take it?

Let us know using the comment box below.

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