Payday lenders: angels or villains?

Angel and devil

After years of slowly mounting concern surrounding the business models of payday lenders and those caught in their clutches, the dam has finally burst - and with it flows an ultimatum from the Office of Fair Trading (OFT): clean up your act or we'll shut you down.

With APRs into the thousands and inescapable advertising, payday loans have quickly become part of our financial consciousness, but the OFT has highlighted a number of practices that need to change if 50 of the leading lenders are to keep their licences.

A report published last month stated the regulatory body had uncovered evidence of "widespread irresponsible lending", aggressive debt collection methods and a failure to conduct adequate assessments of the borrower before lending.

It gave the lenders three months to change their ways or risk losing their licences and also began consulting on whether to refer the £2 billion industry to the Competition Commission.

Clive Maxwell, chief executive of the OFT, said: "We have found fundamental problems with the way the payday market works and widespread breaches of the laws and regulations, causing misery and hardship for many borrowers."

Meanwhile, the Financial Ombudsman Service has revealed it is finding in the consumer's favour in nearly three quarters of all cases it is dealing with involving payday lenders.

The cost of quick cash

What will you pay to borrow £250 for 14 days? (total cost)

  • First Direct authorised overdraft £0
  • HSBC credit card cash advance £12.13
  • Instantloansdirect £17.50
  • The Co-operative Bank unauthorised overdraft £23.10
  • Wonga £40.78
  • Halifax/Bank of Scotland unauthorised overdraft £70
  • NatWest/Royal Bank of Scotland unauthorised overdraft £84

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Your Comments

You really need to say how much it would cost if the loan could not be paid back at the right time.  People use payday loans as a last resort usually and often can't pay it back so the debt accumulates.  What would be the cost of £250 if the person could not pay it back and ended up borrowing more and found themselves in a viscous cycle of debt with the payday loan company?  You hear horrendous stories about a small loan of say £100 can turn into thousands after a couple of years.  These companies prey on the most vulnerable people who often don't fully understand what they are getting into
In theory payday loans are great if they are just used "until payday" when they can be paid back but this is not usually the case and the companies know this