18.05.2012
Over 60% of people who took out payday loans were using the money to pay for household bills or buying other essentials like food, nappies and petrol, a survey by Which? has revealed. CDFA’s Chief Executive Ben Hughes says customers aren’t “borrowing for pleasure or leisure” – read his full comments on the figures below.
The new figures show an alarming picture of people getting trapped in a downward spiral of debt caught by exorbitant penalty charges because they cannot afford to pay back the loan on time. A quarter who had taken out loans said they had been hit with hidden charges such as high fees for reminder letters, and one in five were not able to pay back their loan on time. A third of people experienced greater financial problems as a result of taking out a payday loan, 45% of them were hit with unexpected charges.
The debt trap is compounded with 57% being encouraged to take out further loans, and 45% rolling over their loans at least once. A third of people were bombarded with unsolicited calls, texts and emails before they had even signed an agreement.
The Which? investigation of 34 payday loans companies’ websites also found that most of the companies failed to show clearly their charges or charged excessive amounts for defaulting.
Which? is calling on the OFT to properly enforce existing consumer credit and lending rules that already apply to payday loans firms, and to go further without delay to protect consumers by restricting the default charges that payday loans companies can charge. Which? also wants the Government to review other options to protect consumers, including Australian-style proposals for sensible limits on the total cost of credit coupled with measures to increase the supply of affordable alternatives.
Commenting on the Which survey, Ben Hughes, CDFA’s Chief executive, said:
“Users of high cost credit have quadrupled in the last four years to four million. It’s easy to see why: according to the Economist, 15% of the population are excluded from mainstream bank lending; household and energy bills are increasing; and high-interest lenders are taking an increasingly aggressive approach to marketing. This new research from Which? shows that customers of high interest lenders are not borrowing for pleasure or leisure, but for the essentials – and many are becoming trapped in ever-deepening quagmires of debt.
“Financial hardship is not just bad for these families, but bad for Britain. As more and more household income is needed to pay the interest on high-cost loans, people are left with less money to spend, hurting an already ailing economy.
“There are alternative, ‘JUST’ Finance providers offering affordable loans to vulnerable people. Community development finance institutions provided loans to 21,000 individuals in the UK last year and saved the UKs poorest families £4.3m on high cost credit repayments. But just to meet half of existing demand from individuals the CDFI sector needs to be 71 times larger.
“High interest lenders must be better regulated – and the alternative, affordable and ethical finance providers, such as community development finance institutions and credit unions, need to be more visible and better supported so vulnerable families and individuals have an alternative to these predatory lenders.”
Where next?
- Read about CDFA’s JUST Finance campaign for more support and growth for the ‘Unsung Heroes’ of the finance sector and get involved easily yourself
- More about the Which? survey here.