UK

Payday Loans Crackdown: Why Are Lenders Under Fire?

06/03/2013 09:36 GMT

On Wednesday the government said it would clampdown on the payday lender market to ensure it didn't take advantage of vulnerable members of the public.

New measures include limiting the number of adverts firms are allowed to put out per hour, the times they can advertise and forcing them to make sure that interest rates are clearly displayed.

While payday lenders have argued they fill a vital gap in the market, debt charities have pointed to soaring complaints about firms as evidence that something is "drastically wrong" with the current system.

Here's a beginners' guide to payday loans and why the lenders are under fire.

How does a payday loan work?

Payday loans are intended as a short-term stop gap to tide the borrower over for a few weeks until their next wage. They are meant to be a convenient way of accessing cash to help people cope with an unexpected emergency such as an urgent household bill.

Why have borrowers been having problems with them?

Many borrowers are not using payday loans in the way that is intended and they are instead racking up very expensive debts which will swamp the size of the original loan as payday lenders often charge annual interest rates of several hundred percent.

Debt charities have recently reported sharp uplifts in complaints from consumers about payday lenders and they have urged a stronger clampdown.

The Money Advice Trust (MAT) recently said that complaints about payday loans have doubled year-on-year to reach a record of 20,000 across 2012.

It has warned that "something is drastically wrong" with the way that expensive loans are being dished out to people who cannot afford them, with lenders often rolling over loans.

Citizens Advice recently handed a "dossier of evidence" to the Office of Fair Trading (OFT) suggesting that some payday lenders are bombarding customers with emails and texts to pay back debts, taking money when the debt has been repaid and using aggressive and abusive staff.

Who uses payday loans?

Short-term loan trade body the Consumer Finance Association (CFA) has argued that most customers are those who simply want to "smooth out the peaks and troughs of their finances".

Half of payday loan customers use them just once a year and most are satisfied that they are getting a good deal, according to its research.

However, in its interim findings last autumn, the OFT raised concerns that payday lenders' advertising often appears to target people who are already in trouble.

Around a third of payday lending websites looked at by the OFT included statements such as "no credit checks", "loan extension guaranteed" and "extend loans up to four or five times".

Which? said earlier this week that a quarter of payday loan users it surveyed are using them to plug other debts.

How has the OFT been investigating the industry?

The regulator has carried out spot-checks of 50 major lenders and obtained information from all the lenders in the market. It has been writing to the main trade bodies outlining areas where advertising standards must be improved.

What have payday lenders done to clean up their own act?

Four trade associations, including the CFA, which in total represent more than 90% of the short-term or payday loan industry, put improved standards in place last autumn.

Any lender who is a member of the trade associations must abide by the rules or ultimately face expulsion.

Lenders agreed to give clear information about how a payday loan works, including fees and charges.

However, consumer groups have argued that the new standards are largely just a re-working of rules which have already been flouted.

What else is being done to clamp down on bad lending practices?

The OFT was recently handed beefed-up powers which mean it can now stop rogue firms in their tracks if it believes that consumers are in danger of harm. Before this, firms could continue to trade while they carried out lengthy appeals processes.