Payday loan problems up 82 percent

27 February, 2014

StepChange Debt Charity has seen another substantial year-on-year increase in the number of people seeking its help with payday loan debts. Last year 66,557 people with payday loans sought the charity’s assistance, in 2012 that figure was 36,413, an increase of 82%. The charity believes that this is yet further compelling evidence of the need for substantial reform of the sector, when the Financial Conduct Authority (FCA) assumes responsibility for the regulation of consumer credit in April.

£110m owed on more than 200,000 loans

Last year, the charity handled a total of £110m (£109,647,559) worth of payday loan debt, up from £60m (£60,340,074) in 2012. With the average payday loan client holding three payday loans, the charity dealt with a total of 202,333 payday loan debts in 2013, up from 109,302 in 2012.

Industry failure

The charity continues to see a number of key areas of consumer harm that the payday loan industry has failed to address:

• Irresponsible lending and acute repayment difficulties – the average payday loan debt of a person contacting StepChange Debt Charity is £1,647, more than the average client’s monthly income of £1,381 (net). According to the Competition Commission 35 percent of loans are not repaid on time.
• Debt inflation and escalation – StepChange Debt Charity continues to see numerous cases in which debts are excessively inflated through the application of interest and charges. In one case the charity helped a man whose original £200 debt grew to £1,851 in just three months
• Multiple payday loans - 13,800 people who sought the charity’s help in 2013 had 5 or more payday loans

Anatomy of a payday borrower

Analysis of the charity’s payday loan clients shows that for many people, payday loans are simply part of a broader mix of debt that contributes to financial difficulties. Of the charity’s clients with payday loans:

• 62 percent had overdraft debt
• 60 percent had credit card debts
• 45 percent had personal loan debt
• 39 percent had catalogue debt
• 18 percent had home credit debts

Mike O’Connor, Chief Executive of StepChange Debt Charity, said: “The widespread harm and misery caused by payday loans continue unabated. The industry has failed to address the problems causing untold misery and damage to financially vulnerable consumers across the UK”.

“We hope the FCA’s proposals will address some of the areas of consumer detriment, but on issues such as affordability checking, rollover and repeat borrowing, there is an urgent need for even more radical reform”.

Reforming the payday loan industry

StepChange Debt Charity has called for the following policy changes to help address the problems associated with payday loans:

Affordability checks and real-time data sharing – the Financial Conduct Authority (FCA) should mandate a system of real-time data sharing. This would ensure that lenders have access to up-to-date information on a potential borrower’s situation, including existing payday loans, which is essential to addressing the problem of multiple payday borrowing. We believe that such checks should be an essential part of payday loan firms’ lending criteria.

Debt inflation and charges – StepChange Debt Charity believes that the FCA should use its powers in order to ensure that debts are not artificially inflated through unreasonable interest and charges. It should consider the application of a debt-escalation cap that would limit the amount of charges and interest that can be applied to a loan that is in default.

Rollover – StepChange Debt Charity believes that rollovers should be limited to one. Firstly because rolling over a loan is a clear indication of financial difficulty and so only in rare instances would the rollover of a loan be permissible. Secondly, rollovers significantly increase the cost of loans.

A report commissioned by the FCA suggests that in relation to implementing its proposed policy on limiting rollovers (see below) “without a real-time database that reports all outstanding payday loans, it is not unlikely that lenders will find a way to circumvent it.”[1]

Continuous Payment Authority (CPA) – StepChange Debt Charity believes that if a lender fails to recover the required amount via CPA, this should be treated as evidence that the borrower is in financial difficulty and should only make a further CPA attempt once they are satisfied that this poses no risk of financial hardship to the client. The charity also believes that lenders should be prevented from applying charges for any unsuccessful CPA attempts.

Advertising – research conducted by YouGov for StepChange Debt Charity found that 26.3m people had been offered high-interest credit such as payday loans via unsolicited marketing calls or texts [2]. We believe that the FCA should ban the unsolicited real-time promotion of high-risk credit products such as payday loans. We also agree with the BIS Committee recommendation that advertising for high-risk credit products contain “health warnings” so that borrowers are aware of the risks and consequences.

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Notes to editors:

1. Europe Economics (October 2013): A New Consumer Credit Regime: Benefits, Compliance Costs and Firm Behaviour

2. Figures from YouGov Plc.  Total sample size was 2,017 adults. Fieldwork was undertaken between 20th - 23rd September 2013.  The survey was carried out online.