StepChange Debt Charity identifies payday loan flashpoints for first time
25 June, 2013
StepChange Debt Charity has identified the five cities whose residents have experienced the biggest rise in average payday loan debts in the last two years. Between 2011 and 2012, the average payday loan debt of the charity’s clients in London, Cardiff, Liverpool, Leicester and Birmingham rose between £397 and £563.
The charity says that the figures further highlight the alarming growth of payday loan debts and raise serious questions about widespread poor lending practices among payday loan firms.
Average pay day loan debt and increase, by city and year
||Av payday loan debt 2011
||Av payday loan debt 2012
The increased severity of average payday loan debt problems coincided with growing numbers of people with payday loan debts and more and more people experiencing difficulties because of multiple payday loan debts.
Delroy Corinaldi, external affairs director for StepChange Debt Charity said: “These figures offer a frightening insight into how certain communities appear particularly vulnerable to increasingly high levels of high-cost borrowing which could result in serious financial hardship.
“The payday loan industry is beset by a variety of problems which require prompt action from regulators, politicians and the industry itself.
“StepChange Debt Charity is calling on MPs to support Paul Blomfield MP’s bill that will provide much needed protections for consumers against the worst excesses of the payday loan industry.”
Poor industry practice
StepChange Debt Charity is highlighting a number of serious issues across the payday loan sector ahead of the Office of Fair Trading (OFT) announcement on whether to refer the sector to the Competition Commission (June 27).
StepChange Debt Charity believes the case for reform of the payday loan industry is overwhelming and that reforms should primarily be designed to address the following areas of consumer detriment.
Poor lending checks - the OFT has found evidence of “widespread irresponsible lending” across the sector and that only six of the largest 50 firms make any attempts to make proper income checks.
Rollover –The OFT has found that three quarters of lenders are renewing loans without checking affordability, even though this is a clear warning sign that a borrower could be experiencing financial difficulties.
Rising balances - between 2011 and 2012 the average national payday loan balance of a StepChange Debt Charity client rose from £1,267 to £1,657. In 2012, the charity was contacted by 36,413 with payday loan debts, more than double the number in 2011.
Multiple loans – multiple payday loans are a key driver of acute repayment difficulties. Last year 7,221 people contacting StepChange Debt Charity had five or more payday loans, up from just 716 in 2009. In all of the ‘hotspot cities’ borrowers had an average of three or more loans.
Repeat borrowing – government commissioned research from the University of Bristol suggests it has become normal for payday loan borrowers to get trapped into a cycle of high-cost debt. The average payday loan customer is taking out 5 payday loans a year – in effect, nearly one every other month.
Misuse of Continuous Payment Authority (CPA) – StepChange Debt Charity has seen numerous examples of customers caused significant distress by lenders misusing CPAs. This includes cases where money has been taken from people’s accounts leaving them unable to cover food and housing costs.
Default interest and charges – payday loans are particularly expensive for borrowers who cannot afford to repay on time, as punitive charges and interest are added. In one case a StepChange Debt Charity client faced a total debt of £1,830 for loan of £120. The lender had applied two overdue penalty charges (£80 each), a debt recovery fee (£100), 330 charges for unsuccessful attempts to recover payment (£5 each; a total of £1,650) and £178 in interest (1 percent on the original loan principle every day).
As part of its on-going commitment to provide consumers with comprehensive debt help and advice, the Charity has an in-depth section on its website dedicated to payday loans. It contains information about where to get help with payday loan debt, a guide, statistics, a video, suggestions for loan alternatives, and the chance for consumers to submit their own payday loan experiences.