SHORT-TERM LOANS

TOP THREE REASONS PEOPLE GET A PAYDAY LOAN – and some of the better alternatives

BY RUTH JACKSON BY

More and more people are turning to the new wave of payday loan firms such as Wonga or Ferratum to get a small loan to tide them over until payday. But given the extortionate interest rates charged by these firms, there are far better ways to finance your way through the month. Here are the top three reasons people turn to payday loan providers (according to Ferratum) – and some better ways to get hold of the necessary money.

1WAGES SPENT AND URGENT CASH NEEDED TO LAST UNTIL PAYDAY If you borrowed £100 from Wonga for a week to tide you over until payday you would pay £12.78 in fees and interest – that equates to an APR of 4,214%. A far cheaper idea would be to ask your bank for an overdraft, or for a small extension on your overdraft if you are already at your limit.

2CAR REPAIRS Emergency car repairs can be expensive. A £200 loan from Ferratum for 10 days to cover the costs would set you back £19.50 in interest and fees – the firm’s representative APR is 3,113%. A better option would be to keep a low-rate credit card – these typically offer interest rates of 7 to 15% – for just such emergencies and clear the debt as soon as you can.

3HOUSEHOLD BILLS A household bill shouldn’t come as a surprise so try to set aside the money to cover them all at the start of the month. If you do have to pay one when you have no money, first of all contact the company and see if you can arrange a repayment plan to start after your next payday. If that’s not possible, then again look at extending your overdraft or paying the bill using a low-rate credit card. If you use a payday loan firm such as TxtLoan to borrow £100 for 15 days to pay a bill, you would pay £17 in interest – that’s a representative APR of 4,474%.

THEY SAY/ WE SAY ALDERMORE 100% MORTGAGE THEY SAY… The ‘Family Guarantee Mortgage’ offers those with very little savings and no deposit a way onto the property ladder. Aldermore will lend you 100% of the value of the home you wish to buy if a close relative – parent, step-parent, or grandparent – will secure 25% of the loan against their own home.The maximum loan size is £250,000 and borrowers must be at least 25 with a spotless credit record.

WE SAY… This mortgage is expensive and troubling. A threeyear fixed rate of 6.48% is very high, especially as the guarantee on a second property means Aldermore is only taking on the risk of a 75% loan to value deal.

The second, and more worrying, problem with the deal is that guarantee on a second property. If the borrower fails to pay their monthly repayments, Aldermore will foreclose on their property, but if the proceeds from the sale don’t cover the loan, the lenders can then go after the guarantor for up to 25% of the loan, and if they can’t pay up Aldermore can foreclose on their home too.

14 MONEYWISE | OCTOBER 2011

WWW.MONEYWISE.CO.UK PROPERTY LOWDOWN

Moneywise housing market round-up Buy-to-let properties hold up the struggling market

ACADAMETRICS INDEX Month Average house price Monthly change % Annual change %

Aug-10

£223,969 0.4

8.5

BY RUTH JACKSON BY

Sep-10

Oct-10

£223,886

0

£223,026 -0.4

7

5.3

August was a bad month for the property market, with prices falling by between 0.6% and 2.1%, depending on the house price index consulted. Nationwide reports that house prices dropped by 0.6% in August, following a 0.2% rise in July, with prices down 0.4% over the year. The Halifax index paints a bleaker picture, with prices down 1.2% in August and 2.6% over the year.

“The market has been very volatile over the past few months due to the low level of transactions,” says David Hollingworth, spokesperson at London & Country Mortgages. There are very few properties coming onto the market as most people are choosing to stay where they are unless they have a compelling reason to move.

Unfortunately, it doesn’t look as though the market will perk up any time soon. “With so much economic uncertainty it is hard to see anything that will alter the current position and turn things round to the point of a sustained recovery in prices,” he adds.

But a house price crash remains unlikely. “The lack of property on the market and a positive outlook for the buy-to-let market will help to hold prices up.”

The buy-to-let market is looking fairly healthy, as rising rents mean the yields available to property investors are becoming more and more attractive, bringing new investors into the market.

“In an era of low interest rates, residential property will offer some investors an attractive alternative to other investment classes,” says property expert Henry Pryor. Mortgage lenders also think the market has potential, and more buy-to-let mortgages are appearing.

Overall, “although mortgage availability and products are improving, the lending market remains pretty tight,” says Hollingworth. He doesn’t expect prices to spring upwards in the short to medium term.

Nov-10

£221,513 -0.7

4.3

Dec-10

£221,529

0

2.3

Jan-11

£222,116 0.3

1

Feb-11

£223,883 0.8

0.2

Mar-11

£224,283 0.2

0.9

Apr-11

£222,174 -0.9

0.4

May-11 £219,296 -1.3

-1.0

Jun-11

£217,443 -0.8

-2.2

Jul-11

£218,404 0.4

-2.1

Aug-11

£219,078 0.3

-2.2

Note: The index comprises Land Registry house price data from England and Wales NATIONWIDE INDEX Month Average house price Monthly change % Annual change %

Aug-10

£166,507 -0.8

3.9

Sep-10

£166,757 0.1

3.1

Oct-10

£164,279 -0.8

1.4

Nov-10

£163,133 -0.4

0.2

Dec-10

£162,249 0.3

0.1

Jan-11

£161,211 -0.1

-1.4

Feb-11

£161,183 0.6

-0.1

Mar-11

Apr-11

£164,751 0.3

£165,609 -0.2

0.1

-1.3

May-11 £167,208 0.3

-1.2

Jun-11

£168,205 0.0

-1.1

Jul-11

£168,731 0.3

-0.4

Aug-11

£165,914 -0.6

-0.4

Note: Data is derived from Nationwide lending data for UK properties at the post-survey approval stage rcM technoloGY trust plc

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OCTOBER 2011 | MONEYWISE 15