Payday loans ‘need more regulation’

The government should introduce more regulation to prevent creditors who issue payday loans exploiting the financial difficulties of customers to make more money, a debt expert has said.

This is the view of Georgina Earle from the Release Money Group, who is also a director of Women in Debt.

She said: "We are consumers that abuse lending, but also our creditors are unscrupulous in lending.

"Payday lenders make more money when you do fall behind. I am hoping the government are going to introduce some regulation into the payday lending market."

Ms Earle acknowledged that consumers have often been unwise in the way they have budgeted in the past, with an approach "based on plastic, based on bailing ourselves out with equity in our property".

However, she noted this is now impossible as people have zero or negative equity and argued it now makes sense not to pile up more borrowing.

That may particularly apply to payday loans, which charge high rates of interest to begin with and come with extra charges, penalties and rolled-over interest when those taking them out fail to pay them all back on time.

It means those who may be least able to cope with such borrowing end up accumulating the highest levels of debt.

One result of this is an increase in the number of people going bankrupt, taking on an individual voluntary arrangement (IVA) or having a debt management plan.

New regulation may help to reduce the number of people getting into such deep trouble after taking out payday loans.

Measures ministers could choose to introduce might include limits on the amount people can borrow or the number of loans they can take in a year.

Alternatively, statutory caps could be put in place to restrict the levels of interest such borrowers can charge or the number of penalties they can impose.

People pushed into personal insolvency by their debts now tend to take an IVA rather than opting for bankruptcies.

Insolvency Service figures for the second quarter of 2012 showed there were 11,346 IVAs, compared with 8,088 bankruptcy orders.

By Joe White