Nearly two-thirds of payday loan customers in spiral of debt

A survey has uncovered some of the tricks used by payday loan firms to keep customers in debt.

Written by Trevor Lloyd-Jones on 17 May 2012

 

Over 60% of people who take out payday loans are using the money to pay for household bills or everday essentials like food, nappies and petrol, a survey by Which? has revealed.

The new figures show an alarming picture of people getting trapped in a downward spiral of debt caught by exorbitant penalty charges because they cannot afford to pay back the loan on time.
A quarter who had taken out loans said they had been hit with hidden charges such as high fees for reminder letters, and one in five were not able to pay back their loan on time. A third of people experienced greater financial problems as a result of taking out a payday loan, 45% of them were hit with unexpected charges.

The debt trap is compounded with 57% being encouraged to take out further loans, and 45% rolling over their loans at least once. A third of people were bombarded with unsolicited calls, texts and emails before they had even signed an agreement.

The trend is confirmed by the National Debtline, which has seen a huge rise in calls about payday loans. In the first three months of this year it received 4,725 calls for help with payday loans, 58% more than the previous quarter and 133% more than the same quarter last year.

Questionable practices
Paul Crayston, spokesperson for National Debtline, said payday loan firms are a major source of new debt problems and the charity has evidence they are using questionable lending and collections practices.

"Borrowing money for essential items is a dangerous road to take," he said.

"Anyone considering this should first get some free advice from one of the charitable services....In the vast majority of cases there will be a better and less expensive solution.

"We have heard from people who have been charged astronomical rates of interest and late payment fees, and some who have found themselves many thousands of pounds in debt, despite initially borrowing relatively small amounts. We have even heard from people who have been approved for payday loans despite being insolvent."

But he said consumers need to smart up here too. Borrowing money to pay for food or household bills is a clear indicator that you need to take a serious look at your finances.

£150 late charge
The Which? investigation found that people could face a£150 charge by one company, Quid24.com, if they repaid their loan 10 days late. Most of the companies failed to show clearly their charges or charged excessive amounts for defaulting.

People were also potentially being allowed to take on credit they couldn't afford: eight out of 34 companies don't carry out any credit checks as part of their approval procedure, and nearly two-thirds surveyed were not asked about any aspect of their financial situation apart from their salary.

Some payday loan company websites also failed to provide any terms and conditions and many of those that did had little or no information about a borrower's rights and obligations or references to free debt advice. Some 14 out of 34 lenders failed to inform consumers about the complaints procedure.

 

Call for new protections

Which? is calling on the OFT to properly enforce existing consumer credit and lending rules that already apply to payday loans firms, and to go further without delay to protect consumers by restricting the default charges that payday loans companies can charge.

Which? also wants the Government to review other options to protect consumers, including Australian-style proposals for sensible limits on the total cost of credit coupled with measures to increase the supply of affordable alternatives.