Payday lenders failing to check if people can afford to repay

As people continue to struggle to make ends meet every month, payday lenders are beginning to grow in prominence with individuals turning to them to get a small loan to cover expenditure up until their next pay cheque.

The payday loan industry pledged in its customer charter in 2012 that it would take into consideration people's financial situation before allowing them to take out a loan with them.

However, new research from Citizens Advice has found payday lenders are pushing people into more debt by failing to carry out checks to ensure borrowers can afford to repay the loan they take out.

The Citizens Advice payday loan tracker found 65 per cent of people who took out a loan did not get asked about their financial situation, which is leading to seven in ten not being able to pay it back.

These figures – which are from an analysis of the first four months of findings based on feedback from customers who took out 1,270 payday loans from over 87 different payday lenders – also found customers who were not asked affordability questions. People also had repayment problems were let down by lenders as six in seven lenders did not offer to freeze interest and charges when the borrower agreed repayments.

Some 71 per cent of lenders did not explain how much it will cost to extend the loan and 84 per cent did not treat people sympathetically.

In the last four years the Citizens Advice Bureaux has seen a tenfold increase in payday loans as the cost of living rises and people struggle to pay for their bills and daily living costs.

Payday loans can lead to a situation where debt is never ending. For example, the research found that repaying £57 a month on a £500 loan for six months leaves the debt standing at £437. People naturally cannot afford to pay back the money all at once so are forced to maintain it for long periods of time, wasting money in the process.

It found that customers were pestered at work and even received phone messages on Christmas Day demanding payment, despite the customer saying they could not afford to pay. Many people who have taken out a payday loan are in financial difficulties and have turned to debt management for help.

An increasing number of people are now dependent on payday loans as paying back the loan severely reduces their wage meaning they need to take out another to get by.

Citizens Advice chief executive Gillian Guy said: "Payday lenders are not standing by their word to treat people fairly by checking they can actually afford the loans on offer. The knock-on affect of their irresponsible lending is devastating for families as they become consumed with debt.  

"Many find they have no money to put food on the table, pay the bills or get to work as lenders drain their bank account in a bid to claw back the debt," he added.

By Joe White