Payday Lenders 'Exploiting' Borrowers With Huge Default Fees, Says Which?

Are Payday Lenders 'Exploiting' Borrowers?
General view of the logo of money lending website Wonga.
General view of the logo of money lending website Wonga.
Rui Vieira/PA Wire

Payday lenders have been accused by Which? of "exploiting" borrowers who default on loans with over-the-top fees that raise the risk of them tipping into a debt spiral.

The consumer group looked at the default fees charged by 17 lenders and found that Wonga, one of Britain's most high-profile payday firms, topped the table by charging customers £30.

Wonga defended the fee, saying this reflects the extra cost of someone defaulting.

Ten out of 17 payday lenders looked at by Which? had default fees of £20 or more, while four charged £25 and above.

MoneyShop.tv was found to charge customers a £29 fee for failing to repay the loan on the due date, while other lenders, such as Quickquid.co.uk, charged £12.

Which? has written to lenders to challenge the level of their default fees, which the consumer group believes should be no higher than the admin costs arising from a borrower defaulting.

In the consumer group's legal opinion, excessive default fees are unlawful under the Unfair Terms in Consumer Contracts Regulations 1999, which state that it is unfair for lenders to charge a disproportionately high fee if borrowers default on a loan.

Wonga said its one-off £30 fee for late repayments "reflects the additional costs we incur in collecting these loans" and this has been independently assessed by a business advisory service.

A statement from Wonga said: "As with all our costs, we are completely transparent about our default fee and it's clear to customers when they apply for a loan, and at least three further times before their repayment date.

"On the rare occasions where people can't repay, we always encourage them to get in touch with us so we can do everything we can to agree an affordable repayment plan, including freezing interest and charges."

Which? pointed to an Office of Fair Trading (OFT) decision in 2006 that penalty charges for credit cards should be no more than £12, unless there are exceptional factors.

The consumer group believes that payday lenders are using "excessive" penalty fees to reduce their headline rates and lead customers to under-estimate the true cost of a loan.

Richard Lloyd, executive director at Which? said: "We believe payday lenders are exploiting borrowers with excessive fees which can push them even further into debt."

From April, tough new regulator the Financial Conduct Authority (FCA) will start to oversee payday firms. Which? wants to see the FCA introduce a cap on the level that firms can charge in default fees, as part of a cap on the total cost of credit planned for January 2015.

A spokesman for the FCA said: "We welcome Which?'s interest in this area and we are already considering default fees as part of our work on capping the total cost of credit."

The FCA recently announced plans to crack down on the sector, include limiting the number of times payday lenders are allowed to roll over loans twice, forcing them to put "risk warnings" on their advertising and limiting the number of attempts lenders can make to claw back money if there is insufficient cash in a borrower's bank account to two.

The Competition Commission will produce a report into the payday industry later this year.

Payday firms were referred to the Commission by the OFT, which last year found evidence of deep-rooted problems, including some firms appearing to base their business practices around people who cannot afford to pay their loans back on time, meaning the original cost of the loan balloons and they become trapped with that lender.

Which? said that high charges are one of the biggest factors that tip borrowers into a spiral of debt.

Previous Which? research has found that more than half (56%) of payday loan users had incurred charges for missed or bounced credit repayments over 12 months, compared with one in six (16%) credit users generally. One fifth (20%) of payday loan users surveyed said they had been hit with "unexpected charges".

The Commons Business, Innovation and Skills Committee recently recommended that payday lenders should be banned from advertising on children's television and called for stronger action to tackle nuisance emails and texts to people who are "at their lowest ebb" with offers of expensive loans.

Russell Hamblin-Boone, chief executive of the Consumer Finance Association (CFA), which represents short-term lenders, said its members are committed to helping struggling borrowers rather than immediately imposing default fees.

He said: "Of course, they can only do this when a customer informs them of their inability to pay due to their financial difficulty, so, although it can be hard to talk about it, the best thing customers can do is contact their lender as soon as possible to discuss their situation."

"It is for the regulator to rule whether lenders are compliant with the current trading regulations and have made their charges clear to customers."

An OFT spokesman said: "The OFT welcomes this investigation and is also looking at the fees payday lenders charge customers.

"The OFT believes that fees and charges levied on accounts in arrears or default should reflect actual and necessary costs."

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