4,200% percent increase in payday loan debt problems

Published by Max Salsbury for 24dash.com in Communities and also in Finance

A debt advice charity took 20,000 calls from people needing help with payday loans in 2012 - a 94 percent year on year increase and a rise of 4,200 percent since the onset of the financial crisis in 2007.

Money Advice Trust (MAT) reports that in January this year its National Debtline service took a call for help with payday loans every seven minutes.

MAT is now calling on the Office of Fair Trading (OFT) to make use of new powers to suspend consumer credit licences with immediate effect where it identifies persistent bad practice.

Joanna Elson, chief executive of MAT, said: “Payday loans have come from nowhere to be one of the most common debt problems people face. In 2007 as the financial crisis began National Debtline took just 465 calls for help with payday loans, but last year that figure had grown to 20,013.

“The rapid emergence of payday lending has caught regulators a little off guard. We have waited some time for real action to be taken to help prevent people falling into a serious debt spiral with these loans. We encourage the OFT to protect consumers by suspending the licences of those lenders shown to persistently break the OFT’s own guidance on debt collection.

“National Debtline advisers help around 100 people every day to deal with payday loan debts, some callers have taken out as many as 80 such loans. Borrowing on this scale can have serious ramifications if not dealt with properly, and advice services like National Debtline risk becoming over burdened by the proliferation of payday loans.”

Year by year, the National Debtline took the following call volumes for payday loan problems:

2007:   465
2008:   776
2009:   1,244
2010:   3,330
2011:   10,301
2012:   20,013

Payday lenders are bound by the OFT's Irresponsible Lending Guidance, which states: "Creditors should make a reasonable assessment of whether a borrower can afford to meet repayments in a sustainable manner."

MAT claims it has heard countless examples where this guidance is not being adhered to.

Joanna Elson continued: “Payday loans were initially designed to suit a small number of people in very specific situations, and this is something they can still do effectively. However we hear from thousands of people each year who have been lent money when it was clearly not the right option for them.

“Just like the decision to borrow money, the decision to lend shouldn’t be taken lightly, and the lender must be confident of the borrower’s capacity to repay within the set terms and conditions. Where some payday lenders offer to deposit money in your account within 20 minutes, we are not confident this represents a sensible practice.

“Anyone offering to transfer money into a potential borrower’s account within 20 minutes of an application is unlikely to be carrying out sufficiently thorough affordability checks. We know this because for 26 years our National Debtline advisers have spoken to thousands of people each month about their finances. We know it takes longer than 20 minutes to judge someone’s ability to repay a payday loan debt.

“We also know this through the experiences of the 20,000 people who contacted us last year for help with repaying payday loans. We’ve heard from people who have been able to get a payday loan despite being bankrupt, and from people who have been able to take out a payday loan despite having been unable to meet agreed repayments on 20 similar loans taken out in the previous months. It is clear to us that something is drastically wrong with the way these applicants are being given access to credit they can’t afford to repay."

Commenting on MAT’s report, Russell Hamblin Boone, chief executive of the Consumer Finance Association, said: “With the UK enduring a triple dip recession, it is no surprise that more people are seeking help from debt advice charities like National Debtline. The short term lending industry has seen exponential growth in recent years, so an increase in calls does not mean that problems relating to payday are getting worse. Our members have been actively referring customers to them as a part of our commitment to supporting those who find themselves in financial difficulty. As a matter of course our members will freeze interest and charges, negotiate repayment plans and refer people to third party advice. As responsible lenders we fully support National Debtline’s call to rid the industry of the poor practice and consumer detriment highlighted in their report.”