Half of payday loan users 'cannot afford repayments'
Published by Max Salsbury for 24dash.com in Communities and also in Finance
Half of payday loan users cannot afford repayments
Almost half (48%) of those who have taken out payday loans cannot afford to repay the debt, Which? research has revealed.
The consumer campaigning charity is now calling for a shake-up of the payday lending industry to protect potential borrowers from getting into greater financial difficulties.
The research also revealed that 29% of payday loan users have taken out credit that they knew they couldn’t repay. In the last 12 months, 57% of people with payday loans have incurred charges after missing a repayment.
Which? interviewed a random sample of 4031 British adults in August this year. Of those who had taken payday loans, 43% said that it was too easy to get credit, whilst almost a third (31%) said they had been hassled by debt collection agencies within the last 12 months. One in five said they had been hit with unexpected charges.
The research showed that people are relying on payday loans to pay for rent and regular bills far more than they are using credit cards.
Wonga, one of the country's largest payday loan companies, charges up to 4,215% APR on its loans.
Which? executive director, Richard Lloyd, said: “It’s shocking that half of all people taking out payday loans have been unable to pay the money back and it’s a depressing sign of the times that almost a third were hassled by debt collectors in the past year. Payday loans are leaving many people caught in a spiral of debt and taking out more loans just to get by. That’s when they’re hit by excessive penalty charges and roll over fees.
“The Office of Fair Trading must do more to clamp down on irresponsible lending by introducing tighter rules for payday lenders. Better affordability assessments and clearer charges would be the first steps to clean up the industry and better protect consumers.”
The Office of Fair Trading (OFT) launched a review into the payday lending industry in February and has almost completed its visits to over 50 firms in the UK.
The review will investigate compliance with the Consumer Credit Act and the OFT's guidance on irresponsible lending.
David Fisher, OFT Director of Consumer Credit, said: "We are concerned that some payday lenders are taking advantage of people in financial difficulty, in breach of the Consumer Credit Act and not meeting the standards set out in our guidance on irresponsible lending. This is unacceptable. We will work with the trade bodies to drive up standards but will also not hesitate to take enforcement action, including revoking firms' licences to operate where necessary.
"The payday sector has grown considerably since the OFT's high cost credit review in 2010. This, combined with the current tough economic conditions makes it the right time for us to review the industry and improve protection for consumers."
Which? is now calling for:
- More robust affordability assessments that take into account the borrower’s income, expenditure and their ability to repay the debt.
- Affordability assessments to take place each time a borrower requests to roll over a loan or take out a new one.
- Lenders to be clear and upfront about all extra charges and display them clearly on their website alongside the application process.
- Lenders to do more to help customers in financial difficulty by freezing penalties and working out suitable repayment plans.
- All extra charges to be fair and reflect the true cost to the lender. Excessive charges must be stamped out.