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Sunday, June 30, 2013

The cost of borrowing

Today's Independent has a disturbing report on the scale of the payday loan problem in this country and the misery it is causing for a million families across the United Kingdom.

The paper refers to a poll for Which?, the consumer organisation, which shows that nearly 400,000 families use the high-cost loans to pay for essentials such as food and fuel, while 240,000 need the money to pay off existing credit. They add that half th people who take out payday loans find they can't cover the cost of repayments, which can attract interest rates of more than 5,000 per cent, and this means they are forced to take out new credit and spiral further into debt:

The poll by Which? found that 4 per cent of people, equivalent to one million households in the UK, said they had taken out a payday loan in the last month. Some 38 per cent of people who do so use them to pay for food and fuel, while 24 per cent repay existing payday loans. A total of 79 per cent of people, about 38.5 million adults, use some form of credit, while 44 per cent are worried about their household level of debt.

Seven in ten of payday loan users regret taking out credit in the past, while 49 per cent found they couldn't meet the high cost of payments, and 28 per cent said that, while they don't like being in debt, they saw it as a necessary part of their life.

Nine out of ten people believe payday loan companies should always include the cost of borrowing in advertising, while 87 per cent think the ads should make clear that it is possible to get free help from a debt advice organisation.

A spokesman for the debt charity StepChange said: "These findings are alarming and reflect what the charity is seeing. Credit should never be used to pay for essential living costs, and the fact that so many are using it this way points to a wider problem in the economy.

"This is particularly the case with high-cost credit and underlines why action is needed to tackle the problems in the payday loan industry."

Richard Lloyd, executive director of Which?, said: "Payday lending is dogged by poor practice yet people are increasingly turning to this very high cost credit to cover essentials or pay off existing debts.

"A clear message has been sent to lenders to clean up their act, but the regulator must back this up by enforcing proper affordability checks and punishing lenders who flout the rules. We also want more action from the Government to tackle this toxic market."

The paper says that at tomorrow's summit, Which? will ask for new rules banning excessive charges, a restriction on the number of times a payday loan can roll over, and clearer advertising to help people struggling with spiralling debt. I hope the Government is listening and will act accordingly.

I hope too that the Competition Commission investigation into payday loans companies comes up with some clear recommendations on capping interest rates and insisting on proper credit checks if that is within their remit. The new Financial Conduct Authority, which replaces the Financial Services Authority, will have the power to impose fines on firms and order compensation to be paid to customers. That is something that also needs to happen quickly.
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