Payday Loans Explode

The number of people taking out payday loans has quadrupled over the last four years, according to a new report by Consumer Focus.

In its study - ‘Keeping the Plates Spinning’ - Consumer Focus estimates that the number of people using payday loans has increased fourfold since 2006 to 1.2 million people, borrowing a combined £1.2 billion. Charges typically range from £13-£18 interest for every £100 borrowed, but can be as high as £30 per £100 for some online providers. This can generate APRs in the region of 1000% to 2000% given the short-term nature of these loans.

The research estimates that payday loan borrowers are taking out an average of 3.5 loans a year. Consumer Focus is urging a precautionary approach from industry and regulators to stop borrowers becoming dependent on this form of high interest credit. It says  banks need to offer affordable short-term loans as alternatives, as well as recommending stronger safeguards to protect consumers from spiralling payday loan debts.

The research estimated that last year, the average size of a payday loan was an estimated £294 and two-thirds of payday loan borrowers have a household income of less than £25,000.

The study looked at payday lending in the UK and how it compares to the US, where it is a more established form of high-cost credit. Concern about payday loans has led to a number of US states banning them, although there is a lack of conclusive evidence that doing this necessarily helps consumers, Consumer Focus claims.

With limited alternatives available from mainstream lenders, Consumer Focus believes reform of the UK market is needed rather than an outright ban, which could push people into using illegal loan sharks.

Consumer Focus is calling for the number of loans taken out or rolled over to be limited to five per household annually. Where consumers have ‘rolled over’ or taken out loans a maximum of five times in one year, this should be taken as an indicator of financial difficulty and lenders obliged to direct the borrower to independent debt or money advice.

It also wants payday lenders to share information to avoid people borrowing from multiple lenders simultaneously and develop an industry Code of Practice. They should also be forced to carry out more stringent checks to ensure people can afford their repayments, it says.

Consumer Focus also wants banks to provide affordable alternatives for customers needing to take out short-term loans and alternative affordable credit from social lenders such as credit unions need to be further encouraged and promoted by both the financial services industry and the Government.