'Should we worry more about 10% interest than 2000% APR loans?' blog discussion

edited 5 May 2010 at 11:27AM in Martin's Blogs & Appearances & MoneySavingExpert in the News
15 replies 3.5K views
This is the discussion to link on the back of Martin's blog. Please read the blog first, as this discussion follows it.
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  • euterpe13euterpe13 Forumite
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    I avoid ALL loans like the plague - I have a mortgage, and that's it. If I can't afford something, I don't buy it ; when I was jobless and had only enough to pay monthly bills from my savings, I lived on milk & 19p instant noodles - the thought of borrowing money just did not enter into the equation. I even bought my car cash. I pay off my credit card in full each month, don't have any store cards, don't buy anything on credit. I may sound boring & old-fashioned, but at least I only have my mortgage & utilities to worry about.
    Mr. Micawber could teach us all financial philosophy...
  • MatariMatari Forumite
    36 Posts
    I have always thought that a mortgage is the biggest rip off ever - the amount you have to pay back is criminal. However, I think Martin is right - the payday loans advertise themselves as attracting very high interest rates, which allows people to be somewhat self-selecting (although for those who have poor credit ratings, yet again they are forced to remain in the sub-prime market). In fact, all money lenders should be forced to do the same - only I would rather it not be an interest rate, but a 'real' rate - for example, if you take out this loan it will cost you £500 per year on top of the debt, total £xxxxxx overall.
  • N1AKN1AK Forumite
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    I understand the mathematics behind Martin's post and his position. I don't, however agree with his logic.

    A £100 loan at 1200% actually costs more in interest than a £10,000 loan at 10% over the same time period.

    Obviously taking out a £10,000 loan for 3 years costs you more in interest than borrowing £100 for 10 days, I'd be astounded if it didn't.
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  • DarkConvictDarkConvict Forumite
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    I totally agree, I hate loans, can't afford it don't buy it. Look at the long term goals.

    Main problem with payday loans is people abuse them or fail to understand them, they fail to pay them on time and get locked in a trap of interest.

    Borrow £100 pay back £125 is okay short term, getting an extra £25 some somewhere shouldn't be to hard just once, but getting an extra £25 every month for 25 years could be much more challenging. Add into the fact the 'fun' of compounding interest in a long term situation over just 1 bout of interest been added.

    Payday and secured loans are meant for completely difference purposes, but since payday loans lend to people with poor credit ratings all they end up doing is putting another noose around a desperate persons neck trying to rob peter to pay paul.
    I'm a fond support of financial education so that those growing up understand how it works, and importantly have the right mindset to plan out there future.
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  • jamesdjamesd Forumite
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    N1AK wrote: »
    A £100 loan at 1200% actually costs more in interest than a £10,000 loan at 10% over the same time period.
    The £100 loan costs £25 for a month. Over the same period the interest on the £10,000 loan would be £80.
  • Payday loans are all very well if someone is in a tight spot occasionally and needs a few quid to tide them over. They do perform a good service if that's all they are ever used for. It can be better to sacrifice some money temporarily if it means the gas or electric not being cut off IMO. The problem is when they are needed every or many times in quick succession.
    As for the mortgage rates, something that hasn't been factored in is that the mortgage payments are a replacement for paying rent. It would be necessary to pay rent over those same 25 years and long beyond. On that basis, the mortgage could represent quite a saving over a lifetime even though the property maintenance falls on the mortgage payer. It also gives a property to leave to someone/cash in for a better pension/trade down from for a lump sum etc. So I'm not sure that using those two things as comparisons is particularly valid.
  • MSE_MartinMSE_Martin MoneySaving Expert
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    Payday loans are all very well if someone is in a tight spot occasionally and needs a few quid to tide them over. They do perform a good service if that's all they are ever used for. It can be better to sacrifice some money temporarily if it means the gas or electric not being cut off IMO. The problem is when they are needed every or many times in quick succession.
    As for the mortgage rates, something that hasn't been factored in is that the mortgage payments are a replacement for paying rent. It would be necessary to pay rent over those same 25 years and long beyond. On that basis, the mortgage could represent quite a saving over a lifetime even though the property maintenance falls on the mortgage payer. It also gives a property to leave to someone/cash in for a better pension/trade down from for a lump sum etc. So I'm not sure that using those two things as comparisons is particularly valid.

    I was talking about secured loans not mortgages - ie second charges on homes :)
    Martin Lewis, Money Saving Expert.
    Please note, answers don't constitute financial advice, it is based on generalised journalistic research. Always ensure any decision is made with regards to your own individual circumstance.
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  • I think in all these situations, you need to consider the bigger picture and that is whether it is right for the person taking out the loan.

    I recently took out a new insurance policy on a motorhome. This policy was £250 for 12 months. When I asked about spreading the payments I was told it would cost £20 which I thought sounded ok. The credit agreement turned up and this turned out to be 40% APR at which I was horrified. Then I thought again, and thought "it's only £20 and it saves me having to pay the full amount in one go which might have kept me in overdraft for a few months". I could afford to pay the £250 in one go but chose not to.

    £20 is less than a night out and if it suits people to pay that for a short-term loan then that is fine as long as they are aware of the full picture. The problem arises when that £20 means that they run out of money again before the end of next month and end up borrowing more. The perpetual cycle is very dangerous, but the one-off loan should not be considered disastrous in itself.

    I hope someone finds this helpful
  • GreenSueGreenSue Forumite
    16 Posts
    People wanting to borrow modest amounts would be better going to their local credit union. They can join, borrow cash and then pay back weekly, and automatically become members, and save a small amount each week. This means that when the loan is repaid, they have some cash which they have saved, helping them out of the cycle of constantly borrowing.
  • MSE_Martin wrote: »
    I was talking about secured loans not mortgages - ie second charges on homes :)

    You were indeed. I need better reading glasses I think :D
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