Payday loan problems spiralling

Increasing numbers are struggling with payday loan debt

Payday loan problems spiralling

The number of people struggling with payday loan debts continues to grow substantially.

In the first half of 2014 the charity StepChange helped nearly 13,000 more people with payday loan debts than in the same period last year. Between January and June the charity handled over £72 million worth of payday loan debt that people were having difficulty repaying, up from £51 million in the first six months of 2013.

The charity claims that the figures show the large scale problems caused to consumers by the payday loan industry – and highlight the need for greater and sustained action by the Financial Conduct Authority (FCA) to ensure better protections for financially vulnerable consumers.

The findings were released in conjunction with the charity’s response to the FCA’s consultation on a price cap for high-cost short-term credit in which it has highlighted a number of areas that require greater attention from the regulator.

“Today’s figures show that the payday market all too often fails to treat customers fairly, especially those in financial difficulty,” said StepChange Debt Charity chief executive Mike O’Connor.

“High-cost short-term credit is rarely the answer to financial difficulties. While, the FCA’s proposed price cap is a crucial step forward, there is still much work to be done to ensure that payday loans can no longer plunge people into a cycle of unsustainable borrowing and entrenched financial hardship.

“Consumers will continue to need access to short-term credit and FCA action should also stimulate the reform of this market. This needs to include problems in the adjacent markets including overdrafts, logbook loans and home credit where consumers also suffer detriment. The goal of an affordable lending market treating consumers fairly will also involve others but the FCA has a critical role to play in creating the right environment.”

StepChange recommendations
StepChange is a proponent of a tougher total cost cap than 100% of the value of the loan, especially in relation to higher value loans. The Competition and Markets Authority (CMA) found that the average initial payday loan taken out is £260, while the average StepChange Debt Charity client with payday loan debt has an income (net) of £1,305. This means that someone with just one payday loan debt which reaches the 100% cap would end up owing a substantial part of their income and could easily lead to further borrowing and deeper financial difficulty.

The debt charity considers that the FCA should mandate the participation of lenders in a real-time database. This would ensure that lenders have current information on a borrower’s situation and help address the problem of repeat and multiple borrowing. Last year, 13,800 people who sought the charity’s help had five or more payday loans.

“There should be stricter limits on how much firms can profit from default fees and that the FCA should consider a separate cap on default costs. This would ensure that lenders do not automatically allow debts to reach the 100% cap as a matter of course and would encourage lenders to lend responsibly in the first instance,” added the charity.

O’Connor also believes that default fees should be brought in line with other sectors: “The FCA has proposed a £15 fixed default charge, which is potentially high relative to the cost of a payday loan. The cap on default charges for credit cards is £12, which means there is a clear case for bring these fees in line with other sectors.”

Payday loans January – June 2014 January – June 2013
Number of people with payday loan debts 43,716 30,762
Total payday loan debt handled by StepChange £72,210,340 £51,227,222
Average total payday debt per client £1,652 £1,665
Total number of payday loan debts handled by Stepchange 123,159 95,435

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About Author

Shelly Ford

Shelly Ford, assistant editor at Every Investor, has worked as a writer within the banking and insurance sectors for ten years. She has a particular interest in personal finance and retail banking.

  • Alaska Young

    Well, many consumers complain that payday loans lead to the debt spiral. Actually, I don’t understand why people with serious financial problems use such loans. Everybody knows that payday loans are expensive and have high interest rates and getting them only makes sense if you just need to get short term loan easily to fix unexpected financial problem quickly. But still it’s hard to make ends meet if you have low income so whatever others say some people will still use such products because they don’t have another way out.

  • Anna5577

    I am very surprised that people take out payday loans and pay a very high interest rate knowing that it`s a part of the debt cycle! Do not they realize that when they receive the next salary they must make a payment on a loan and they will be without money again? They should calculate the cost of each month, including bills for electricity and gas. Remembering myself, I survived because I used to apply for payday loans online 24/7.

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