Beware of Borrowing - Five Minute Guide to Payday Loans
The Express, 10 Mar 2013
By Esther Shaw
Vulnerable consumers who face paying up to 4,000 per cent in annual interest to borrow from a payday lender stand to benefit from a new crackdown on the sector. The Office of Fair Trading (OFT) announced last week that it is giving 50 of the largest payday lenders – accounting for 90 per cent of the market – 12 weeks to change their business practices or risk losing their licences after uncovering evidence of “widespread irresponsible lending“.
It is also referring the market to the Competition Commission, and it is now hoped that the commission will take further action to protect consumers in financial difficulty.
In addition, from April 2014 the industry is due be regulated by the Financial Conduct Authority (FCA), which has greater powers and resources than the OFT. These include the power to cap interest rates and impose a limit on the number of rollovers lenders may offer.
In its year-long review of the £2 billion payday lending sector, the OFT found evidence of several problem areas including issues with advertising and failure to adequately check affordability before lending or rolling over loans. Failure to explain sufficiently how payments will be collected and aggressive debt collection practices were also a concern.
What are payday loans?
Payday loans are small, short-term unsecured loans designed to help tide people over until they get their wages; they provide a fast fix of cash with limited credit checks. While payday lenders insist they are providing a service, many individuals have fallen victim to persistent bad practice from certain firms.
Why is payday lending a problem?
Those who turn to this form of borrowing often have limited alternative sources of credit and “Many people take out more and more payday loans in a desperate attempt to stave off debt, falling into a downward spiral that can only ever make their position far worse,“ says David Rodger from the Debt Advice Foundation. In fact, although these products are described as being “one-off short-term§ loans“ costing an average of £25 per £100 for 30 days, the OFT found that up to half of payday lenders' revenue comes from loans that last longer and cost more because they are rolled over or refinanced. National Debtline says it took 20,013 calls about these loans last year, up from 10,031 in 2011 and just 465 in 2007. Separate findings from debt charity StepChange show the problem of payday-loan debt is being felt more acutely by the under-25s than any other age group, with these products now representing the third most commonly-held debt among the 18-25s, behind credit cards and personal loans.
What do the new proposals mean for consumers?
Campaigners have welcomed the OFT's announcement. “We're pleased the Government and regulators are planning tough action to crack down on irresponsible lending, especially on high-cost lenders that exploit consumers struggling to get by in tough economic times,“ says Richard Lloyd from Which?. Michael Ossei from uSwitch adds that for too long, payday lenders have focused their marketing activity on capturing a vulnerable audience through adverts on daytime TV and direct text messaging. “The recommendations show that the OFT and the Government mean business,“ he says. Sylvia Waycot from MoneyFacts adds that while the crackdown is welcome, consumers will still have to wait a year before the FCA takes over complete regulation of the sector. “Until then, those in difficulty will be left dealing with what is largely a self-regulating industry,“ she warns. Campaigners were also disappointed that the Government backed away from introducing a cap on the cost of credit.
Russell Hamblin-Boone from the Consumer Finance Association, which represents some of the largest payday lenders, says the CFA will take time to review the issues. “However, since the industry was investigated last year we have introduced safeguards to ensure our members are dealing responsibly with customers,“ he says. “From credit checking all new applicants to limiting loan rollovers, we have raised standards all through the loan process.“
What are the alternatives?
Despite these safeguards, you should still ensure you have exhausted all the alternatives before contemplating a payday loan.“Credit cards from a provider such as Capital One can help people who have struggled with debt, or who have a limited credit history, to borrow,“ says Andrew Hagger from MoneyComms. “With AmigoLoans.co.uk you can borrow up to £5,000 as long as you can get a creditworthy relative or friend to act as guarantor. The rates on these products are high – at 34.9 per cent with Capital One and 49.9 per cent with Amigo – but are still well below those charged on short-term payday loans.“
Those in difficulty could also consider their local credit union; visit FindYourCreditUnion.co.uk.
Complaining about a lender
If you have a complaint about your payday lender, you should take it to them first. If you're unhappy with the response you should contact the Financial Ombudsman Service (FOS).
The FOS says there has been a significant increase in the number of complaints about payday lending this financial year, and that it has taken on up to 50 new cases each month. It is finding in favour of consumers in nearly three quarters of cases: call 0800 023 4567 or visit FinancialOmbudsmanService.org.uk.