Kingston loan sharks loading borrowers with unmanageable debt levels and using intimidation to recoup them face new regulations from the Consumer Finance Association.
From November 26, payday lenders will have to abide by a new code of conduct following revelations of irresponsible lending across the industry from the Office of Fair Trading (OFT). Many of the UK’s 240 payday lenders, which charge up to 4,500% interest, do not conduct proper affordability checks and allow customers to take out multiple loans, according to a current OFT investigation. Several of the 50 main firms could face closure when the body publishes its full findings in the new year.
Michelle Seaward, client services manager at the Kingston Citizens’ Advice Bureau said: “Irresponsible lending is a big issue. Lenders are supposed to undertake credit checks but we see a lot of unemployed people with more than one payday loan.”
“We certainly have clients coming to us with payday loans who are in financial difficulties and quite a lot of people on benefits who have taken them out and are struggling to pay them back. In the past two years we’ve definitely seen more of that.”
Payday lenders are supposed to check that borrowers are able to repay loans before giving them out, however according to OFT findings, many borrowers are unable to repay debts taken out and many are ‘rolling over’ current loans.
A spokesperson said: “We inspected a number of firms during the course of this review and we expect to warn the majority of them that they risk enforcement action if they don’t improve specific practices and procedures.”
The OFT have the power to take away consumer credit licences, effectively putting lenders out of business. They can also impose fines of up to £50,000 for breaching requirements.
But Richard Lloyd, executive director of consumer group, Which? is sceptical about OFT regulation. In response to the new regulations, he said: “The revised code largely amounts to a re-brand of many of the existing rules that have been flouted by some unscrupulous lenders for years. If this code is to be worth the paper it’s written on, far more needs to be done to enforce the rules and protect vulnerable people who are getting caught in a downward spiral of debt.”
According to Lucy Westcott, marketing manager at H&T pawnbrokers, based on Castle Street, Kingston, these recent attacks on the industry are unfair. She said: “We acknowledge that there are some payday lenders who follow some bad practices, however we fully comply with the OFT regulations and are committed to transparency and fairness.”
She added: “With every payday loan, firstly we ensure the customer understands the loan terms, how much they are borrowing and what they will be required to repay. We ask them if they will be able to afford to repay the loan, we ensure the customer is in employment and we check current status with credit referencing agencies.”
But the industry has come under the firing line consistently in recent months for negligence and bad practice. On November 8 Which? published survey results showing one third of payday loan users had taken out credit that they couldn’t afford to repay. In May it conducted research showing that 10% of people were going without food to meet repayments.
Last month the Financial Ombusdman said it had received 271 new complaints concerning payday loans between April and September of 2012.
According to Ms Seaward, the problem is getting worse as the industry expands: “Payday loans were used by 1.2m people last year and according to our latest figures 4m people are likely to consider taking out a payday loan in the next 6 months,” she said.
Last week MP Stella Creasey told Radio 4’s Today programme: “The government needs to get a grip before this debt tsunmani engulfs whole sections of Britain.”
Payday loans are supposed to be last resorts for desperate borrowers excluded from mainstream finance and nearing the end of their overdrafts. But hidden charges and soaring interest rates have led to high numbers of ‘zombie debtors’ who end up borrowing more just to pay back the interest on the first loan.
For borrowers in need of emergency cash, payday loans are cheaper than an unauthorised bank overdraft. Research by Watch my Wallet found that a payday loan at 4214% interest rate can be cheaper than going £11 over the overdraft limit in a mainstream bank.
According to Ms Westcott payday lenders provide a necessary service: “Often our customers are unable to get access to other forms of credit such as overdrafts from banks and credit cards and might have exhausted or not have the option of asking friends and family. A payday loan from H&T, which is the cheapest on the high street, gives the option of borrowing until they next get paid which often is cheaper than an un-authorised overdraft.”
But Ms Seward expressed doubts over the value of the industry. She said: “If your washing machine breaks down and you need to replace it immediately there might be a case for it but generally if you’re unsure of whether or not you can pay it back they’re a very bad idea.”
She added: “There isn’t an easy answer, but we’d like to make sure that if people do take them out, they know what they’re taking out and the cost of what they have to pay back.”
The OFT will publish the results of their industry wide investigation in the new year and all lenders will have to comply with the new regulations from November 26.
