Payday loans are back in the spotlight after the Bank of England’s historic rate cut last week. The lowest base rate for over 300 years at 1.5%  is intended to increase lending and free up stagnant credit markets by making the cost of borrowing cheaper.

The rate cut has served to highlight the contrast between high street lending and cash advance or payday loans. Interest on payday loans can range from 10,000% to 21,000% APR in an industry that’s worth £3 billion a year.

What adds to the controversy surrounds payday loans is the demographic at which they are aggressively marketed. It is the most vulnerable who make up the largest proportion of payday loan borrowers. People on low income, in irregular employment and in deep debt, evidence suggests are targeted by payday loan firms through newspapers, magazines and daytime television.

Shadow Housing Minister, Grant Shapps, is calling for a review of payday loans in a bid to protect people in desperate financial trouble. Mr Shapps claims to have numerous reports of people forced to repay £300 on a £200 loan within the space of one month with an APR ranging from 1,284% to 2,100%.

Responding to unfair conduct accusations, payday loan companies have said that the nature of these loans – being short-term – means they cannot be compared with regular personal loans. The APR rate for example is a misnomer in itself. Payday loans are geared towards being paid at the end of the month and not over a 12 month term.

They have also argued that in lending to high-risk clients, they are within their rights to impose interest rates that reflect the potential for loss.
 
Mr Shapps has blamed lack of competition for the payday loan problem, which is monopolized by just six lenders.

The Competition Commission discovered that this contributed to borrowers being overcharged by £100m every year.