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Struggling Brits caught in a payday loans debt trap

18th May 2012 Print

Over 60% of people who took out payday loans were using the money to pay for household bills or buying other 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.

A Which? investigation of 34 payday loans companies' websites also found that people could face a £150 charge by one company,, 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 - 14 out of 34 lenders failed to inform consumers about the complaints procedure.

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.

Which? executive director Richard Lloyd said: "With 1.2 million people taking out a payday loan last year, it is unacceptable for this rapidly growing number of people to be inadequately protected from extortionate charges and dodgy marketing techniques. At its worst, this booming £2billion industry can be seriously bad news for borrowers who are struggling to afford food or pay their bills. People are getting caught up in a debt trap, whacked with high penalty charges, or encouraged to roll over payments and take out more loans at inflated rates. 

"The regulator should properly enforce the existing rules that apply to this industry, but they must go further and impose a cap on the amount that lenders can charge for defaulting.  The Government should also now explore other ways to protect hard-pressed borrowers, including Australian-style measures to cap costs and promote affordable alternatives."

Which? wants to see:

The OFT restrict the total costs to consumers of charges incurred if they default on a loan. Charges should be proportionate and clearly communicated, and lenders should not be able to charge extortionate amounts for sending reminder letters, rolling over loans or transferring funds.

The total cost of credit displayed in cash terms so that interest and charges are clear, up-front and comparable across lenders.

Health warnings on adverts and marketing which specifically warn borrowers about high charges if they do not pay back on time, similar to the obligation on mortgage providers to point out to borrowers that their home may be re-possessed.

Terms and conditions for all loans which includes information about complaints, rights to cancel and the consumer's rights if they default.

Mandatory affordability assessments for all payday loans and for lenders to verify income levels and expenditure.

Lenders should signpost to free and independent debt advice and freeze charges for those in financial difficulties.Which? also wants the government to ensure protections for consumers are strengthened when the regulation of payday loans market moves to the FCA.