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Payday loans – the quick fix that could spiral out of control

Need some dosh, wonga or moolah? If this doesn’t mean anything to you, you’re probably not one of the 1.2 million Brits who took out a payday loan in the past year. And there are very good reasons why you shouldn’t…

I’ve spent the last few weeks rummaging through payday loan websites. And not because I’m desperate for some cash, but to find out how good (or bad) lenders are at informing customers about the key features of these loans that often come with an expensive price tag. Result: not very good.

And although I’m greeted with advertisements to take out speedy and easy payday loans everyday, knowing what I know, I’m not tempted in the slightest.

Can’t afford to borrow? No problem!

We found that 8 out of 34 payday lenders did not perform a credit check as part of the application process. But even if they did, that doesn’t stop them from lending to people who cannot afford to pay them back.

Our survey of payday loan customers found that almost half had rolled over their loans at least once – clearly a sign that people struggle to repay the loan on time. Yet more than half claimed to have received communications from lenders encouraging them to do so. This seriously puts into doubt lenders’ claims that they are ‘responsible lenders’.

We also found that a third of payday loan customers experienced financial difficulties as a result of taking out a loan, such as being unable to pay for essential bills. This is unsurprising given that most lenders do not actually ask you for any financial information other than your salary – hardly a thorough way of assessing whether somebody can afford a loan.

And since over 60% of the people we asked took out payday loans to pay for essential bills anyway, they’re getting caught in a spiral of debt, where they’re hit with exorbitant penalty charges because they can’t afford to pay back the loan on time.

KA-CHING! The sound of default

Judging by what some lenders charge you for reminder letters, you could be forgiven for thinking that they must be using diamond-encrusted envelopes.

One lender, Quid24.com, charges £25 for each reminder letter they send you. And they send them quite often! The fifth email on the tenth day of missing your payment will even set you back by £50. This means that a small loan from this lender could hit you with as much as £150 extra, which is hardly what you want to hear if you already struggle financially.

In fact, I struggled to work out exactly what it would cost me if I defaulted, as many lenders don’t put this information on their website. If it is stated at all, it’s often only put on an FAQ page rather than the terms and conditions where they belong.

Despite all this, the market for payday loans is growing as many people have nowhere else to turn for emergencies. Would you take out a payday loan? If not, why not? Or do you think there’s a place for payday loans provided lenders clean up their act?

What do you think about payday loans?

Payday loans should be banned altogether (52%, 113 Votes)

They would be OK provided payday lenders cleaned up their act (37%, 81 Votes)

If people need a payday loan, then leave them to it (11%, 23 Votes)

Total Voters: 217

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Comments
Guest
Alan Stuart says:
18 May 2012

If 60% of payday cusomers were experiencing difficulies in paying for essentials before taking a loan and this reduced to 30% after taking a loan, is that not an improvement ?

It seems the only problem with payday loans is the cost of defaulting. However, the cost of defaulting on mainstream financial products can be much higher – CCJs, charging orders, repossession etc. Default on your council tax and you can be sent to prison. Since council tax is a debt to the state, perhaps MPs should look at their own policies towards defaulting debtors before getting too busy censoring others.

Guest

Hi Alan,

You’re quite right in pointing out that for some people payday loans or similar high-cost loans are an important lifeline. However, I still think that having almost a third of people still being in financial difficulty shows that it might not be the best solution even though it is an improvement for some. There is also a more fundamental issue around people not having access to affordable credit in the first place and banks not offering products that could compete with payday loans (ie. loans that are short term and with fast access).

Our main concern is, as you pointed out, around default charges. We’re not saying that payday lenders are worse than others but they (and others) still need to improve the way they charge people in financial difficulties and treat them fairly.

Guest
LolaB says:
18 May 2012

“However, the cost of defaulting on mainstream financial products can be much higher – CCJs, charging orders, repossession etc. Default on your council tax and you can be sent to prison.”

I am quite sure that charging orders and repossession is also what you will face when actually defaulting on your payday loan.
Council tax is a tax you have to pay and no loan, so that is not even comparable to the cost of taking out a loan (apples and bananas, right).

Guest
Damon Lynch says:
18 May 2012

Help Stella Creasy MP take on the legal loan sharks
The vote for proposals to tackle legal loan sharking will take place on Tuesday 22 May 2012. Please ask your MP to vote for amendment 40 of the Financial Services Bill and help give British consumers the same protection from payday loan companies other consumers across the world enjoy!
#SaveBianca! Ask Your MP to help end legal loan sharking on Tuesday 22 May 2012!

Hello!

The vote for proposals to tackle legal loan sharking will take place on Tuesday 22 May 2012. Please ask your MP to vote for amendment 40 of the Financial Services Bill and help give British consumers the same protection from payday loan companies other consumers across the world enjoy!

In a House of Commons debate in April the Government Minister responsible for this bill Mark Hoban agreed the Financial Conduct Authority should be able to regulate the cost of the credit, but refused to back this amendment which would explicitly authorise the FCA to do this. They plan to tell their MPs to vote against it and so stop this proposal becoming law.

Independent consumer legal advisers are clear – without explicit authority to do this the regulator will struggle to use new powers as these companies will contest any such action in the courts. The Office of Fair Trading has also admitted the involvement of ‘expensive lawyers’ in cases has influenced their ability to act, highlighting the need to address this problem.

This amendment is a key tool in the fight to tackle legal loan sharking – Fines will only have a limited impact on an industry which is making millions lending money at astronomical rates of interest to British families. On the otherhand, capping their charges could send a strong signal about what costs of credit will be tolerated in the UK. Its the first step towards securing industry wide caps on the total costs of credit, and so giving British consumers the same protection from these loans that others around the world enjoy.

Below is a sample text to use to email your MP to ask them to vote for this amendment – you can find the contact details of your MP here. You can also help by tweeting about the campaign using the #savebianca hashtag in reference to the recent Eastenders storyline on this subject!

Help me make a difference to the families in our communities struggling financially because of these companies by taking action- let’s together end legal loan sharking in Britain!

Stella Creasy
Labour and Co-operative MP for Walthamstow
p.s. Please also share this email with your family and friends to ask them to defy the Government and support this amendment on Tuesday!

Suggested text to send to your local MP
Dear XXX
As one of your constituents I’d like to ask you to vote on Tuesday 22 May for an amendment 40 to Clause 22 of the Financial Services Bill to help tackle legal loan sharking.
In an industry making so much money from lending to people at excessive rates of interest, fines will do little to curb their behaviour- one firm posted a pre-tax profit of £162m last year, and another paid its chief executive £1.6m. On the otherhand, giving the new regulator explicit powers to cap the charges they can set would send a strong message to this industry about the costs for loans that should be considered acceptable and the way they can treat British consumers. It could make a real difference to the millions across our country now struggling financially who are borrowing from these companies to make ends meet by encouraging firms to reduce their charges.
Ministers claim they support the spirit of the amendment but refuse to vote for it- legal advisors are clear that without explicit powers to act, these companies will be able to challenge action in the courts. Don’t let the fight against legal loan sharking become a fee generating opportunity for lawyers- please vote for this amendment on Tuesday and join the fight to end legal loan sharking in Britain.
I look forward to reading that you voted for this amendment,

Guest
Damon Lynch says:
18 May 2012

Sorry Nisha
I meant to compliment you on a well written ,interesting article.
You must have worked hard.
I was that involved in posting i forgot to put it in.
You will go far in your profession that is for sure.
Well done.

Guest
Alan Stuart says:
18 May 2012

Lola, council tax enforcement is relevant because we’re discussing the enforcement of debts and it is completely irrelevant, in that context, who the creditor is and what the debt is for. As for charging orders and possession proceedings – no, these don’t happen with payday loan debts.

Guest

In our view payday lenders should meet the highest standards when it comes to how they deal with customers in financial difficulties. Yes there are probably businesses or other organisations that are worse but that shouldn’t justify bad behaviour just because it’s less bad than what others do.

With mortgage arrears for instance, the FSA sets guidelines on how lenders can charge borrowers. Charges have to be proportional and fair and lenders have to show that the costs are justified. We’d like to see a similar approach taken in payday lending to put a stop to excessive charges.

Guest
LolaB says:
18 May 2012

Alan,

I see your point on the council tax, and yes, so it is probably a case of apples and apples (or rather debts) here. Apologies for that. I guess I should switch my brain on next time before typing away.

For charging orders etc, I need to take your word, I have little experience on this matter.
What I meant is simply that payday lenders surely have some way of reclaiming their outstanding debt, no? Since the outstanding amounts are obviously much less than what you would get if you default on your mortgage, say, it would make sense that they would not be able to send the repo man around. But surely, if you cannot pay, you either have to declare yourself bankrupt or, in the most extreme cases, go to prison — just as with the council tax (for which I suppose this is also reserved only for really extreme cases)?