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Are Banks Making It Harder to Borrow Just as Payday Loans Get Easier?

02/08/2013 14:37 BST | Updated 29/09/2013 10:12 BST

The Archbishop of Canterbury recently caused a stir in the British press because he pledged to 'out-compete' the payday loan company Wonga. The Church of England isn't directly in the lending business, but he was pledging to offer as much help as possible to Credit Unions, so the unions can extend help to poorer people who need small amounts over a short term.

The next day the Church of England was in the news again as sharp-eyed financial reporters noticed that some of the investment funds used to store Church finances were investing in Wonga. Embarrassing for the Archbishop, but then many of us have pension funds with big fund managers and no idea of the companies that our own money is actually invested in.

This war on the payday loan companies is new for the Church, but there has been extensive negative press about their activities for some time now.

In some ways, the criticism is unfair because it always focuses on the APR. Companies like Wonga offer a very specific product, which is fast cash for a short period of time. The media uses the APR rate as a comparison, but APR doesn't work very well when loans are quoted over a short period of time.

Take a simple example - just as a personal illustration, and not linked to what any company is offering. If I lend you £100 and you promise to pay me back £120 in a week, you might consider it is a good deal. It's going to cost you £20, but you might be desperate for that £100 immediately and can't wait another week until you get paid.

But that £20 increase in the amount being repaid over a repayment time of one year would equal a loan at 20% - over a period of a week to expect the same amount in interest would be an APR of over 1,000%!

Suddenly, that loan looks more like extortion.

I'm not trying to defend or criticise the payday loan companies. They have a place in the market; where better controls are needed for these companies is in rolling up existing debt and creating a new - bigger - loan. That's where real problems can develop because the initial small amounts escalate quickly.

But there is a strange situation in the UK at present. Payday loans are getting easier to obtain and yet lending to small businesses and other long term loans from regular high street banks seems to be harder than ever to obtain.

The banks say that companies are not asking for the money. The small businesses say that the banks have created so many lending restrictions since the economic crash that it's now very difficult to get a bank to lend cash - many companies have given up asking for support.

It seems a dangerous situation is developing where employers can't get the cash they need to grow, yet payday loans are easier than ever to obtain.

Will the Church of England ride to the rescue by facilitating small loans at reasonable rates? I hope so, but the Church can't save British businesses - that's going to need government action, soon!