Payday lenders failing to check if people can afford to repay
Payday lenders are damming people to debt by failing to carry out checks to make sure borrowers can afford to repay the loan, says Citizens Advice.
New figures from the Citizens Advice payday loan tracker found 65% of people did not get asked about their financial situation - leading to 7 in 10 not being able to pay back the loan.
Yet this goes against pledges the payday loan industry made in its customer charter launched on 26 November 2012. Citizens Advice is monitoring to see if the industry is sticking to the charter through its payday loan tracker.
The new figures are from an analysis of the first four months of findings based on feedback from customers who took out 1,270 payday loans from over 87 different payday lenders between 26 November and 31 March. Data was gathered through an online survey, questionnaires in bureaux and face to face surveys on the high street.
The figures also found that customers who weren't asked affordability questions and had repayment problems were further let down by lenders as:
6 in 7 did not offer to freeze interest and charges when the borrower agreed repayments
71% did not explain how much it will cost to extend the loan
84% did not treat people sympathetically.
During the same time period over 11,000 people sought online help from Citizens Advice about payday loans. In the last four years Citizens Advice Bureaux have seen a ten-fold increase in payday loans.
Citizens Advice Chief Executive Gillian Guy said: "Payday lenders are not standing by their word to treat people fairly by checking they can actually afford the loans on offer. The knock-on affect of their irresponsible lending is devastating for families as they become consumed with debt. Many find they have no money to put food on the table, pay the bills or get to work as lenders drain their bank account in a bid to claw back the debt.
"Payday lenders need to prove their charter is not just an empty gesture by making sure they check the loan is affordable and help those who struggle to pay back the loan.
"We also need to see banks stepping up to the plate by providing a responsible short-term credit offer so that a payday loan isn't the only option for poor families looking for a little extra to get them by."
Evidence from the payday loan tracker exposes how payday lenders dammed their customers to debt and hounded them for money:
Never ending debt: despite repaying £57 a month on a £500 loan for six months, the debt still stands at £437.
Hounded: customer pestered at work and even received phone messages on Christmas Day demanding payment, despite the customer saying they couldn't pay, were in financial difficulties and had gone to a debt management company.
Now payday loan dependent: a year after taking out a payday loan the borrower is now dependent on them as paying back the loan severely reduces their wage meaning they need to take out another to get by.
Raid on bank account: even though a repayment plan was agreed and a request to cancel the continuous payment authority was made (which takes money automatically from your bank) the borrower's bank account is still raided on a daily basis.
Trapped into rollovers: difficulties in paying back the loan in one lump sum leaves little choice but to re-borrow or rollover to the next month, increasing this customers total of payday loans to four.
Citizens Advice has used its extensive evidence to expose the practices of payday lenders and take action against the industry:
In February Citizens Advice reported four payday lenders to the OFT and called for them to be immediately banned from trading
Citizens Advice is carrying out a year-long study which monitors the performance of the payday loan industry against its self-regulating charter.
Last August Citizens Advice provided evidence on the payday loan industry to the OFT's investigation which saw lender MCO Capital Limited stop trading in March 2013.
Citizens Advice is running the payday loan tracker survey until the end of November 2013. Payday loan customers can provide their feedback online at adviceguide.org.uk/dialogue_payday_loan_survey