Why do we regret taking out payday loans?
Payday lenders often come under fire for their money lending practices, so we decided to ask people about their experiences with payday loans. Have you ever taken a payday loan and lived to regret it?
Payday lenders have flooded the market recently and have been criticised for their high interest rates, which can extrapolate out to APRs of over 1,750%. They also claim to help people who have poor credit histories, making it an easier option than a traditional credit card or loan.
So what’s the problem? At Which? we’re concerned that these loans target more vulnerable people, potentially leaving them in a worse situation than they started.
Oui, je regrette mon payday loan
Sadly, our survey found that 69% of people who took out a payday loan have regretted taking out credit, compared to just 31% of people who took out more traditional types of credit (loans, credit cards etc.)
I have to admit, I wasn’t surprised that so many people had regretted taking out a payday loan; especially when half of these people said they’d taken out credit they couldn’t afford to repay. We also found that over 43% of payday loan borrowers agreed that it was too easy to get credit.
This raises concerns about the robustness of checks carried out when people are applying for loans. We’ve previously found that when most borrowers apply for a payday loan, they’re only asked about their income. But we also want credit assessments to take into account expenditure and the ability of a borrower to be able to pay back in a sustainable way. After all, most people can afford to pay back a loan on the day they get paid, but what happens the week and the month after?
Worryingly, we also found that 57% of people with payday loans have missed a regular payment (ie. a debt repayment, a gas bill, rent etc) in the past year.
Turning regret to relief
More and more people seem to be taking out payday loans these days, and often to cover essentials like food and fuel, as you can tell from this table:
|What are people spending payday loans on?|
|Essentials: food and fuel||38%|
|Repay other debts||24%|
Many people are finding it hard to escape from their debt, as they’re forced to take out more payday loans to pay off existing ones. And it can spiral out of control as excessive penalty charges and rollover fees waiting around the corner if they miss their repayments.
We think it’s vital that lenders are clear and upfront about all charges involved alongside the application process. In fact, we’re calling on the Office of Fair Trading to crack down on irresponsible lending with excessive charges being stamped out.
We also think that if someone is struggling to pay back their loan, lenders should do more to help them by freezing penalties and working out suitable repayment plans.
If payday lenders can implement these changes, we’ll hopefully start to see the number of regretful borrowers start to fall. Have you ever found yourself regretting a payday loan?
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