Steve Doran took out a payday loan in March 2011 and cleared her debts only at the beginning of this year.
She first borrowed about £170 but after paying it back took out another, bigger loan, and then eventually borrowed more than three times the original sum.
Steve, 26, from Dartford, Kent, feels that young people need to be alerted to the dangers of payday loans. ‘My outgoings matched my incomings but there was little room for an emergency,’ she says.
VICIOUS CIRCLE: When Steve Doran repaid her loan she had nothing to live on so she had to borrow again
‘When I repaid the first loan I no longer had enough money to get through the month, so I took out another loan and so the cycle went on.’
Steve, who works as an activities co-ordinator at a residential care home, borrowed from payday giant Wonga, which operates a ‘trust rating’.
This means that borrowers who repay on time are often rewarded with the chance to borrow more next time. Steve says she was eventually offered a loan higher than her monthly salary, which she did not accept.
‘It was only bloody-minded determination that got me out of this spiral of debt,’ she says.
‘I always felt shy about admitting to anyone that I was having problems because I was worried that people would judge me. It’s not just the staying up at night wondering how to pay it back – you also feel alone. I don’t want other people to feel that way.’
Wonga says Steve changed her salary details, which forms one part of the criteria for deciding loans and might explain why she was offered more than her monthly income.
It says: ‘Wonga is committed to lending money only to people who can afford to pay it back in a timely fashion.
‘An instance of a loan offer exceeding salary shouldn’t be possible, but we’re not perfect.’
The company says 85 per cent of loans are repaid on time and less than ten per cent of loans are extended.
'Our distraught friend signed up to a nightmare'
Arthur Breens and his wife Judy, 69, were deeply affected by the plight of a friend in debt who came to them for help last summer.
Anna (not her real name), 30, has learning difficulties and did not realise what she was signing up to when she initially borrowed less than £500.
High rates, penalties and debt rolled over into new loans saw the original borrowing mushroom into £5,000.
COMFORT: Arthur and Judy Breen advised a young friend
Money was also taken from her bank account when she was not expecting it, a common – and legitimate – feature of payday loans. Arthur, 66, a builder from West London, took time off work to sit down with his friend and try to piece together the paperwork.
He says: ‘It was a nightmare scenario – she had completely lost track. It was so sad for us to see this bright and cheerful young girl weeping in front of us, and to see the financial tangle she was in.’
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Anna had used a mix of payday lenders online and on the high street. Matters were further complicated because some of the debt had been sold on to collection companies.
‘It was hard to work out what had been passed on to whom and when,’ says Arthur. Feeling out of his depth, Arthur took Anna to get professional financial help.
A small repayment was made and the remainder of the debt will be written off. He says: ‘She understands that she borrowed too much and is not paying it back, which she feels guilty about.
‘But the companies didn’t even check her status and it is clear to me that this is all too common.’
The right way to borrow... what you can repay
Payday loans should only ever be used when customers are guaranteed to be able to repay after the month is up.
And the priority for choosing a lender should be cost, not speed.
COMPARE: The difference in cost of a £100 loan over 30 days can be as great as £37, so comparing is vital.
Choose a lender belonging to the Consumer Finance Association, the Consumer Credit Trade Association, the BCCA, or the Finance & Leasing Association, which represent short-term lenders. In theory, members should be following a Good Practice Customer Charter. Repay on time.
CONSIDER ALTERNATIVES: Ask your bank what overdraft it offers and the costs.
First Direct offers £250 interest-free as standard with its 1st Account, while Nationwide offers a three-month interest-free overdraft with its FlexAccount.
Santander allows new customers to use an interest and fee-free arranged overdraft for four months with both of its current accounts, after which fees apply.
Tesco Bank’s Clubcard credit card gives 16 months’ interest-free credit. Barclaycard Initial – for people with bad credit – offers three months of zero interest on purchases. The rate of interest owed after three months starts at 29.9 per cent but could be more, depending on who is applying.
To put this into perspective, £100 borrowed and repaid in one month would cost about £2.50.
You can find more credit card examples with comparison websites such as MoneySupermarket or GoCompare.SEEK HELP: If in crisis, book an appointment at your local Citizens Advice office (citizensadvice.org.uk) or contact Step Change (stepchange.org, 0800 138 1111) or the National Debtline (nationaldebtline.co.uk, 0808 808 4000).