Are payday lenders breaking the law by charging huge late payment fees

We think that some payday lenders could be breaking the law by charging excessive fees when a customer misses their loan repayment. We’re challenging lenders to justify them or lower their charges.

It goes without saying that it’s not a good idea to take out a payday loan that you can’t afford to pay back. However, sometimes things can happen – such as losing your job or an unexpected expense – and even someone with the best intentions can end up not being able to repay a loan on time.

We’ve looked at the fees that payday lenders would charge someone if they failed to repay the loan in full on the due date and found that they vary from £12 to £30, with Wonga and The Money Shop topping the charts with £30 and £29 fees. Remember these default charges are levied on top of the interest that will continue to build up on the loan – so it’s easy to see how these loans can spiral out of control.

Exploiting borrowers with excessive fees

At Which?, we think it’s wrong for lenders to profit from people in financial difficulty – instead they should be helping them to get their finances back on track. Of course payday lenders need to make a profit, but the interest rates they charge are high enough for them to make a healthy return without needing to further exploit people struggling to repay the loan.

The Unfair Terms in Consumer Contracts Regulations (1999) state that penalty fees are unlawful if they are excessive. We think – and the Office of Fair Trading agrees with us – that fees should not be higher than is necessary to recover the administrative costs associated with defaulting, including sending out a letter to notify the borrower of his default and attempting to encourage the customer to rectify the situation.

Given that a number of payday lenders only charge £12 for default, we don’t see why others need to charge much higher fees of up to £30. We’re calling on lenders to show us that they are acting within the law, and that their fees are no higher than the administrative costs associated with defaulting. If they can’t do that, they need to lower their fees right away. We need your help to keep up the pressure on payday lenders – you can help by signing our petition here.

Have you ever been charged a fee for a late payment? Has the high fee caused your finances to get out of control?

malcolm r says:

14 January 2014

I doubt you can expect payday lenders to “help them get their finances back on track”. They are loan sharks in sheeps clothing, largely American and out to make as much monay as they can by exploiting the vulnerable. Last night’s programme with “Dave the Bank” suggested many countries will not allow these companies to behave the way they do here – why do we tolerate them? We need organisations that will help people in financial difficulties budget their income properly and advise them how to overcome temporary financial difficulties – or publicise existing organisations that could help, like CAB – and ethical lenders who would take on the extra risk these people pose but at sensible interest rates.
Why suggest tinkerin with the Payday loan companies’ terms when a radical change is needed?

Chris Gloucester says:

17 January 2014

Malcolm, Dead right.
Payday lenders (essentially loan sharks) do not need modifying they need eradicating.
These parasites prey on the desperate and stupid and although you could argue the victims have only themselves to blame remember it’s the rest of us taxpayers who end up paying out to salvage the mess. It’s the taxpayer who pays when the bottom falls out of the victims world in the form of benefits etc etc. So getting rid of parasitic payday lenders will directly or indirectly do everyone a favour.

Government money spent educating the “financially challenged”, either challenged through desperation or stupidity, would be money very well spent, and financial competence should also be a subject on every school curriculum.

wavechange says:

About all that can be said for payday loan companies is that they are regulated, whereas illegal loan sharks are not.

I believe it is time to put an end to the glossy advertising promoting payday loans and to ensure that anyone taking one out is given proper financial advice beforehand.

Chris is right about the need for the need for teaching financial competence at school, and perhaps there is a case for shock tactics to encourage spending from savings rather than going into debt.

Wavechange, “About all that can be said for payday loan companies is that they are regulated”. As we know from major banks, for example, there is poor regulation. Payday loan regulation appears not even worth that description – it allows vulnerable people to be ripped off without sound advice being given – something they appear to have been stopped from doing in other countries.
We have said several times elsewhere – the best way to minimise financial problems is to learn how to manage your finances. Why is guidance not being offered widely to help people with this? Another new conversation knocks banks for the opacity of charges they make for “unauthorised overdrafts”. Why should we be condoning unauthorised overdrafts when authorised ones can be arranged if you are a suitable candidate? Somehow we need to get a culture of helping those who genuinely merit it, and providing guidance with responsible spending. Start in school, but for many this now needs to come from elsewhere.

Poor regulation can at least be improved, but surely it is better that desperate people go to established companies rather than loan sharks operating illegally. I did suggest that advice should be given before loans are handed out, and also that the crazy advertising that makes payday loans sound like a good idea should be banned.

We might be able to tackle payday loans and their extortionate rates but I’m even more concerned about the large number of people living on credit, though governments past and present seem to have done little to address the problem.

moudi says:

21 January 2014

Something is seriously wrong here. I cannot believe that a government could be as cruel and indifferent to allow this happens to its most vulnerable citizens, most particularly when they are experiencing the deepest economic hardship in generations.

At a time when savers are forced to accept 0.5% in interest on the grounds to helping recovery, loan sharks are allowed to charge borrowers extortionate rates adding to more than 5000%.

Ten thousand times! Is this a fair trade?

renniemac says:

22 January 2014

the reason the Government wont do anything until pushed is the tax they gain from these companies. they originally came from America and the Americans had enough of them and told them to sling their hook.
now they are over here causing misery.
people should look to credit unions they are the safer alternative. and local CAB will let you know where to find ones locally.

Mary says:

27 January 2014

I don’t have any experience of payday loans but have obviously read about them. But I suddenly find myself directed that way. I need a loan for two months – when some money I am due will come through. I have tried the bank but I will face a penalty as I want to pay back the loan before their minimum time (12 months). Credit card will forward me a loan but from what I understand the £5000 will cost me £280 for two months. To me, a complete novice, that seems very high. Then I was directed to these pay day loan companies but I’m very wary as they seem a rather “dangerous” way to borrow. Maybe when you are looking for short term loans there isn’t much difference. I have no other loans but it seems to me that the more you borrow and for longer its better with the established sector.

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