Payday loan debt continues to soar
Published by Max Salsbury for 24dash.com in Communities and also in Housing
Payday loan debt continues to soarImage: Money Arrow via Shutterstock
The number of people getting into debt with payday loan companies has risen drastically in the last year, a charity has revealed.
StepChange, a debt advice organisation, has released figures showing that it helped nearly 13,000 more people with payday loan debts over January-June this year than in the same period in 2013.
The charity helped 43,716 people in the first six months of the year, who were collectively in over £72 million worth of payday loan debt - a drastic increase on the first six months of 2013, when the total debt was £51m.
However, the average debt of each individual contacting the charity dropped slightly - from £1,665 per person in 2013 to £1,652 in 2014.
Meanwhile, the total number of separate payday loan debts the organisation dealt with soared - from 95,435 in the first six months of 2013, to 123,159 in the first half of 2014.
StepChange believes the ballooning figures reveal the "large scale consumer detriment caused by the payday loan industry".
The charity says that further and sustained action by the Financial Conduct Authority (FCA) is needed to ensure better protections for financially vulnerable consumers.
Payday loan firms, dubbed "legal loan sharks" by campaigning Labour MP Stella Creasey, charge borrowers interest rates of up to 4,000% APR.
StepChange believes there is a case for a tougher total cost cap than 100% of the value of a loan, especially in relation to higher value loans.
The Competition and Markets Authority (CMA) found that the average initial payday loan taken out is £260, while the average StepChange client with payday loan debt has a net income of £1,305, meaning that someone with just one payday loan debt which reaches the 100% cap would end up owing a substantial part of their income and could easily lead to further borrowing and deeper financial difficulty, the charity says.
StepChange recommends that the FCA should mandate the participation of lenders in a real-time database, ensuring that lenders have up to the minute information on a borrower’s situation and addressing the problem of repeat and multiple borrowing.
Last year, 13,800 people who sought the charity’s help had five or more payday loans.
The charity also believes that there should be stricter limits on how much firms can profit from default fees and that the FCA should consider a separate cap on default costs.
This, StepChange says, would ensure that lenders do not automatically allow debts to reach the 100% cap as a matter of course and would encourage lenders to "lend responsibly in the first instance".
StepChange's chief executive, Mike O’Connor, said: “High-cost short-term credit is rarely the answer to financial difficulties. While, the FCA’s proposed price cap is a crucial step forward, there is still much work to be done to ensure that payday loans can no longer plunge people into a cycle of unsustainable borrowing and entrenched financial hardship.
“Consumers will continue to need access to short-term credit and FCA action should also stimulate the reform of this market. This needs to include problems in the adjacent markets including overdrafts, logbook loans and home credit where consumers also suffer detriment. The goal of an affordable lending market treating consumers fairly will also involve others but the FCA has a critical role to play in creating the right environment.”