The wild west of financial services – payday loans
According to a prominent charity, twice as many people had debt problems specifically relating to payday loans in 2012 as in the previous year.
The StepChange debt charity helped 36,413 people last year who had payday loan debts, more than 20,000 up from the previous year.
The average debt of those in trouble was £1,657, the advice charity said.
With annual percentage rates of interest in some cases of over 2,500%, many people find that they are unable to even pay off the interest far less the original sum.
At present, and unlike many other European countries, the UK has no legal limits on rolling over loans and so a £100 payday loan if rolled over for six months could cost as much over £800, making it impossible to pay off for many people.
To make matters worse, many payday loan companies employ large broker networks to generate business, which will generally incur a broker fee, which is often payable upfront; meaning the applicant must pay a fee just to apply for an advertised loan, in addition to the high rate of interest.
Payday loans originated in the USA, but have spread quickly in the UK over the past 5 years.
Payday lenders have been criticised by some bodies (such as Citizens Advice) for making it too easy for a vulnerable person to over borrow at high interest, thereby creating long term financial hardship. They are accused of encouraging irresponsible lending and for exacerbating debt problems as borrowers face high rates of interest if they can?t pay back the cash in the required period.
A possible alternative to the payday loan, in some areas at least is the not-for-profit credit union sector.
For example, London Mutual Credit Union is leading a drive is offering one-to-three month loans at an interest rate of 26.8% and is promising instant cash (a must in this market). It says borrowers can obtain “cash when you need it quickly” with payday loans in 15 minutes.
As a cost comparison, London Mutual charges £8 interest on a 30-day loan of £400 while Wonga charges £125.48 interest and fees. What’s more, London Mutual imposes no add-on penalties for late payment, just the interest, which on £400 is just 27p a day.
In March, the results of a review by the Office of Fair Trading described evidence of “widespread irresponsible lending” among payday lenders.
The regulator gave the biggest 50 firms 12 weeks to change their practices, or risk losing their licences.
It also plans to refer the market to the Competition Commission, after it found “deep-rooted” problems in how payday loan companies compete.