Payday loans have always been a controversial product. But worrying new findings suggest that payday loans may even damage borrowers’ chances of getting credit in the future. So what can we do about it?
On Monday, new codes of conduct for the payday loans industry come into force. Following the Office of Fair Trading’s review of the payday loans industry this week, chief executives from the industry were quick to hold up the new code as an example of how the industry is getting better.
Hopefully they’re right, and that these codes will help clean up the bad practices of the payday loans industry. However, if the new codes are going to be worth the paper they’re written on, far more needs to be done to enforce the rules and protect vulnerable people.
To that effect, we want to see stronger commitment that lenders will carry out robust credit checks, to make sure that only those who can afford payday loans can actually take them.
Proper credit checks for payday loans
When we first looked into the industry this year, we found that when processing a loan, most payday lenders only asked borrowers about how much they earned to assess if the borrower could afford repayments. They neglected to check the customers’ outgoings, or whether they had other credit products or a healthy credit history.
The results of these insufficient eligibility checks were revealed in our recent survey, when we found that half of payday loan users had taken out credit they couldn’t repay.
If the payday loan trade bodies properly monitor and enforce the updated code, there should be fewer borrowers getting into financial difficulty. But payday loans users may come to regret their loans for another reason.
Keep an eye on your credit report
The Financial Ombudsman has heard anecdotal evidence of payday loan users struggling to access other forms of credit, like mortgages, later down the line. We’ve also heard that lenders have been telling consumers that payday loans, even those paid back on time, could have a detrimental impact on their credit ratings.
Most credit reference agencies list a payday loan separately, rather than including it in the general overview of credit history. To me, this highlights that payday loans are viewed differently to other types of credit.
So far, the Ombudsman doesn’t appear to be getting lots of complaints about payday loans damaging peoples’ credit histories. If they do start coming in, it could be another dent for those who thought these loans were an innocent quick-fix.
This is why we need to hear from you – if you’ve taken out a payday loan, have you had any problems gaining credit since you had it?