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Joel Ohman is the CEO of a private equity-backed digital media company. He is a CERTIFIED FINANCIAL PLANNER™, author, angel investor, and serial entrepreneur who loves creating new things, whether books or businesses. He has also previously served as the founder and resident CFP® of a national insurance agency, Real Time Health Quotes. He also has an MBA from the University of South Florida. ...

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Founder, CFP®

UPDATED: Nov 13, 2012

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Almost half of UK paycheck advance customers struggle to repay their loans, and a third took a loan out knowing they could not repay it, according to a United Kingdom consumer watchdog group.

Which?, the largest consumer body in the UK, said that half of all payday loan borrowers cannot afford to pay back their debts.

“It’s shocking that half of all people taking out payday loans have been unable to pay the money back and it’s a depressing sign of the times that almost a third were hassled by debt collectors in the past year and one in five said they had been hit with unexpected charges,” Which? executive director, Richard Lloyd, said in a press release. “Payday loans are leaving many people caught in a spiral of debt and taking out more loans just to get by. That’s when they’re hit by excessive penalty charges and roll over fees.”

Paycheck advances are commonly referred to as payday loans. Paycheck advances allows borrowers to access money before their next paycheck arrives. A major concern with these loans is that many people are unable to repay the debt, which results in steep interest fees. Paycheck loan companies charge high late payment fees that can mount to 4,000 percent annually.

Louise Brittain, Association of Business Recovery Professionals R3 Council Member, said that in one year’s time, the number of people considering a paycheck advance increased by 50 percent. Brittain said this highlights that the “payday loan phenomenon is here to stay.”

“If used in the right way, to fill a genuine one-off gap in finances, a payday loan does have a place. However they are increasingly being taken on as a debt solution instead of a financial solution,” she said in a press release.

In the past six months, 12 percent of 18 to 24-year-olds prioritized paying back paycheck advance debt over buying food.

“This is surely not what the payday providers intended,” Brittain said in the release. “If money has to be spent paying back these debts ahead of food, clothing, gas or electricity then these loans aren’t doing their job, and are in fact only exacerbating a difficult situation.”

But the impact of not repaying cash advances on time is now beginning to hit more aspects of credit. Experian, the UK’s biggest credit reference agency, has begun categorizing paycheck advances separately from other borrowing when issuing credit reports. Now the seemingly small loans will count against a borrower’s ability to get a mortgage in the future.

“We decided to begin separating short-term loans from ordinary loans in our reports because they are becoming increasingly popular,” an Experian spokesman said to This Is Money UK.

He said clients have requested this information from Experian but that there’s been a “mixture of responses” from mainstream lenders.

And borrowers are not getting any relief yet. Now that the holiday season is near, lending companies are increasing their misleading advertisements. UK lender Uncle Buck states on their website to “Be sure to spread Christmas cheer by taking out a payday loan.” The company’s annual percentage rates (APR) reach a staggering 4,248 percent.

June Walker, chief executive of Glasgow Credit Union, said Christmas time can be a difficult addition to some household incomes, so people turn to paycheck advance lenders without understanding the potential outcome of the loan.

“We’ve seen customers with several short-term payday loans that have spiraled out of control. They end up paying 4,000 percent APR and borrowing from one payday lender to pay off another,” she said to the Independent. “It’s a vicious cycle.”

Una Farrell of the StepChange Debt Charity said borrowers tend to feel alone with nowhere to turn and would “urge anyone considering using credit at Christmas to think about ways of cutting down their spending,” Farrell said to the Independent. “They should not be tempted by high-cost credit that can be accessed at the click of a mouse.”