Payday loan charges ‘leading to debt issues’

Consumers using payday loans could find themselves trapped in a debt spiral if they default. 

Research by Which? has discovered ten of the 17 leading payday loan firms levy default fees in excess of £20, with Wonga the highest at £30, and this puts additional pressure on hard-pressed Britons.

The body believes that under the Unfair Terms in Consumer Contracts Regulations 1999, excessive charges are unlawful and so it is calling for this practice to be stamped out. Back in 2006, the Office of Fair Trading ruled that penalty charges for credit cards should be no more than £12.

A previous study by Channel 5 and YouGov discovered 70 per cent of people would back a total ban on payday loan advertising, which demonstrates how many individuals do not support these types of firms. 

High charges are one of the biggest causes of debt, as consumers frequently find the repayments too steep and therefore default, which affects their credit rating and leaves them in a precarious financial situation. 

Some 56 per cent of payday loan users admitted they had incurred charges for missed or bounced credit repayments over a 12-month period – this figure drops to 16 per cent for all credit users. A further 20 per cent have also faced unexpected charges, while nearly half (48 per cent) of payday loan users took out credit they couldn't afford to repay. 

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. If they cannot justify why these charges are so high and refuse to cut them, we would look to take further steps to protect vulnerable consumers. The regulator must also take action to ensure all fees are fair, proportionate and only reflect lenders' costs."

The body is calling on the Financial Conduct Authority to introduce a cap on default fees to stop lenders charging excessive amounts. 

By James Francis