Payday lenders ignoring borrowers ability to repay
Payday lenders are failing to check whether borrowers can afford to repay their loans, damning new figures from Citizens Advice reveal.
The evidence shows that the actions of some payday lenders are contributing to the pressure on household finances, with some families sucked further into the debt trap.
Its 'payday loan tracker' found 65% of loan applicants were not asked about their financial situation, which led to 7 in 10 not being able to repay the money borrowed.
This is a clear breach of the payday loan industry's voluntary customer charter, which some of the bigger lenders agreed to in November. It states they will "carry out a sound, proper and appropriate affordability assessment and credit vetting for each loan application and before the loan is extended (rolled over), to check you can afford the loan".
The figures, based on feedback from customers who took out 1,270 payday loans between 26 November 2012 and 31 March 2013, also show that 6 in 7 lenders failed to offer to freeze interest and charges when the borrower agreed repayments and 71% did not explain how much it would cost to extend the loan.
Gillian Guy, chief executive of Citizens Advice, said: "Payday lenders are not standing by their word to treat people fairly by checking they can actually afford the loans on offer. The knock-on affect of their irresponsible lending is devastating for families as they become consumed with debt.
"Many find they have no money to put food on the table, pay the bills or get to work as lenders drain their bank account in a bid to claw back the debt."
Meanwhile, Stepchange Debt Charity has reported a 109% annual increase in the number of people seeking help dealing with payday loans, to more than 36,000 in 2012. The charity says the average payday loan debt was £1,657 in 2012, compared to their clients' average monthly income of £1,320 a month.
The Office of Fair Trading is currently investigating continued poor lending practices exercised by payday lenders and has given them until 28 May 2013 to clean up their act or else risk losing their consumer credit licenses, which would prevent them from trading.
If you need help to manage your debt, free help and advice is available from:
Citizens Advice, citizensadvice.org.uk, 020 7833 2181
The National Debtline, nationaldebtline.co.uk, 0808 808 400
The Consumer Credit Counselling Service, cccs.co.uk, 0800 138 1111 or 0800 138 3328 in Scotland.
Short-term cash loans designed to be borrowed mid-way through the month to tide the borrower over until they next get paid, whereupon the loan is settled. Generally used by people with bad credit ratings and/or no access to short-term credit such as an overdraft or credit card. Like logbook loans, this type of borrowing is hugely expensive: the average APR on payday loans is well over 1,000% and in some instances can be considerably more.