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Payday loans trap one in five in 'downward spiral of debt'

Which? calls for tighter regulation of payday loans after a survey reveals 20% of people cannot afford to pay back their loans.

 

by Michelle McGagh on May 18, 2012 at 10:11

Payday loans trap one in five in 'downward spiral of debt'

A fifth of people who take out payday loans are unable to repay them and are left trapped in a downward spiral of debt thanks to hidden charges and high fees, new research has revealed.

According to a survey by Which? 60% of people who take out payday loans use the money to pay for household bills and essentials such as food, nappies and petrol.

And more worryingly, 20% of those who take out payday loans are unable to pay back the loan on time.

Hidden charges

A quarter of people surveyed said they had been hit with hidden charges, and a third had experienced greater financial problems after taking out a payday loan – of those people 45% were hit with unexpected charges.

When unable to pay, 57% of the borrowers had been encouraged to take out further loans to cover the cost, with 45% of people rolling over their loans at least once.

A Which? investigation into 34 payday loan companies’ websites showed that borrowers could face a charge of £150 with Quid24.com if they were just 10 days late repaying their loan.

It also revealed that most companies failed to show their charges clearly, or charged excessive amounts for defaulting on the loan. The companies were also accused of allowing people to take on credit they couldn’t afford, with eight out of the 34 companies failing to make credit checks.

Two-thirds of borrowers surveyed were not asked about any aspect of their financial situation.

The pressure under which potential borrowers are placed was also revealed by the report, with a third of people saying they had been bombarded with unsolicited calls, texts and emails before signing an agreement.

Some lenders failed to inform consumers about their right to free debt advice, and 13 out of 34 lenders failed to inform borrowers about the complaints procedure.

Calls for regulation

Which? is now calling on the Office of Fair Trading to enforce the consumer credit rules that apply to payday loan companies and to restrict the default charges that can be levied.

It has also suggested restricting the amount of credit offered to a sensible limit and offering affordable alternatives.

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8 comments so far. Why not have your say?

joe stalin

May 18, 2012 at 13:37

Payday loans are a cancer we should work to eliminate as fast as possible. With Vince Cable too busy creating a climate of fear uncertainty and confusion in the financial sector these parasites will likely be left to continue being able to prey on those in our society who for one reason or another are the hardest hit.

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Mac

May 18, 2012 at 13:45

In 'primitive' 3rd World countries, the Central Bank maintains a confidential record of aggregate individual credit card etc risk,to which banks asked to sanction new cards can refer. They can see whether new/extra credit is appropriate or not - and in some cases, there is even a hierarchy of creditors as a result, if they do decide to lend.

So everyone is motivated to be 'prudent'....

Maybe we could learn something from these "unsophisticated" societies ??!!

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Hotrod

May 18, 2012 at 14:55

I think it's absolutely disgraceful that these vile practices are allowed. They are not under islamic law, for good reasons.

Somehow or other these businesses and the people who work for them, under the cloak of respectability, have to be "named and shamed"

The vulnerable have to educated into how to avoid being lured into a financial trap that will destroy them.

If the Govt. regulators, and ethically minded people in influential positions really wanted to tackle the problem, I'm sure ways could be found.

Why not make a short film, putting actors in real life situations, to illustrate exactly how these sharks operate, with inter-actions to demonstrate typical consequences. The film could be distributed free on a CD or better still why not get the producers of East Enders and Coronation Street to write a script depicting the lives of vulnerable people being torn apart by unscrupulous spivs.

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Roger Savage

May 19, 2012 at 01:15

How many people who take out payday loans are really desperate for money, and how many are useless with money and living beyond their means? I can't stand payday loan companies but the 'I want it and want it now' society we live in means that the ill educated or feckless are easy pickings for such loan companies. People have to take more responsibility for their finances and learn to live within their means - something the easy credit legacy of Blair and 'prudent' (hah!) Brown discouraged.

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Alan's opinion via mobile

May 19, 2012 at 01:16

Anyone who signs an agreement with these loan-shark payday loan companies, when they clearly state interest rates of 2,3 and even 4000+ percentage APR in their adverts must be mentally deficient.

Did none of these ripped-off borrowers ever go to school and learn what added percentages mean?

Sometimes the nanny state can go too far in taking away people's ability to think for themselves.

We don't need new laws - just point out that people should actually read what they are signing up to.

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Beamtree

May 19, 2012 at 10:30

The above comments are largely inaccurate!

These companies are essentially providers of short-term loans. You can walk off the street, and with a few forms of ID and appropriate answers to some questions, you can immediately walk away with several hundred pounds to tide you over for the next month or so for any short-falls you may have in your income.

There`s no waiting for lengthy applications and waiting weeks for subsequent decisions.

For this facility, where they give/risk you their money, they charge you about 30% on average, i.e., £30 for every £100 you borrow.

It is meant to be a short-term loan, so APR figures dont apply and its fascile to use them in order to attack these companies.

Recently, a friend of mine who was made redundant and going through a divorce, swore that he couldnt have gotten through without Cash Converters, a company that lends money on goods and makes payday loans. He was able to raise money on his laptop, tv,camera, spare mobiles, and various other goods he didnt immediately need.. His bank had frozen his account. I also helped him out but he needed the services of this company. I went with him when he made an application for a short-term loan of £300. They informed him that if he missed a payment, there would be a £8 default charge everytime he missed a payment.; no other charges apart from the interest of £30 per £100 borrowed.

I was impressed.

He made his repayments according to the schedule they agreed with him and fortunate to find a job and was able to redeem his goods.

Contast this with my experience:

As a result of being abroad on business for a number of months some five/six years ago,and unknown to me after standing orders left my account, I went overdrawn on my current account with a big 4 UK bank by less than a £100. I was charged £56 for a letter month-end which didnt arrive for some 10 days well into the next month for which I was charged another £56 and some 2% per day for every day I was overdrawn. I ended-up paying over £300 for an overdraft of about £70. Thats over 400% repayment!

I know which I would prefer should I need short-term monies!

If people choose to abuse a facility thats provided, then thats a matter for them and they should suffer the consequnces. Nobody forces people to use the services of these companies!

Cigarettes, alcohol, bullets & arms are sold. If you become an cigarette or a booze addict, thats your fault; if you choose to use a gun to kill, thats your fault; if you live beyond your means, thats your problem - everybody has a choice!!!

As some have said above in their comments, people have got to take responsibility for their own actions!

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Hotrod

May 19, 2012 at 13:04

@Beamtree

It would seem to me that you have confused "secured" loans, which Pawnbrokers offer, with "unsecured" loans which are Payday loans.

The rates offered by Pawnbrokers are much lower because at no time is the lender's money at risk. Goods and Chattels to which the loan has been advanced have been valued, typically at 30% of their resale price, and are in the lender's possession.

In the worse case scenario the borrower loses the value of the possessions if he/she cannot meet the repayments on time because the items have to be foreited.

In my opinion this arrangement is infinitely better than Payday loans, which bind the borrower into a contract of compounded interest rates which increase expontentially until the capital is repaid.

It is this excalating mountain of debt which borrowers fail to understand will eventually drive them to bankruptcy.

People of low intelligence are not alone in this deficiency. You have only to examine the present fiscal money crises to realise that eminent economists have fallen into the same trap.

Your own predicament was brought about because the overdraft was "unauthorised" ; had you contacted the bank and come to some arrangement regarding when sufficient funds would be deposited to clear the debt, the charges may have been reduced. With online banking and now mobile phone banking becoming the most convenient ways of monitoring one's accounts, instances of unauthorised overdrafts should become less frequent.

My revulsion of the payday loan business is that it thrives on a culture ignorance and intimidation.

The author of this article clearly stated that borrowers reported being bombarded with emails and text messages until they signed a contract. That is not "fair-play" it is coercion. Roger Savage is quite right that Brown and Blair turned a blind eye, and what astonishes me is that home economics are not given greater importance in the school curriculum.

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joe stalin

May 20, 2012 at 12:37

While it may appear to some of us that those unfortunate enough to be in a position to have to resort to pay day loans need their heads examining, I feel that banks have ceased to be a community service able to offer finacial support and advice where needed. It is of course no wonder when you have the likes of Vince Cable and Adair Turner looking at ways to keep screwing our banks for their own political ends at every opportunity. Their constant meddling is preventing our banks from recovery and no matter how they huff and puff banks will not now look beyond what needs to be done to hoard the maximum amount of cash to cover the potential impact of further idiotic legislation coming from this equally idiotic Coalition. Like in Greece and in Spain it is the poor shmuck on the streets who is struggeling to feed his or her family that is taking the brunt of economic thinking by those who have long lost touch with reality. In Greece the ordinary workers are getting legged over by the professional classes who have never contributed to the state's funding requirements. To some extent this is happening here as well, our politcal "elite" are all hiding something from the taxman it matters not whether they work in the civil service in Government , trying to become Mayor of London or the leader of the RMT on a £100000/yearliving in a council house paying a pittance in rent. Leave our banks alone, let them recover and only then make them resume the function in society thay once did. It is common sense really- if only we had a Government with some of that.

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