Payday loans to be investigated

The issue of payday loans has been an increasingly prominent one in recent years. The emergence of short-term lending that requires few or no credit checks and therefore means customers can get much-needed cash in their hand swiftly is, it is argued by proponents, a very handy and useful way for people to get hold of funds when they need them rapidly.

And the appeal of such services has been rising, with TV and other adverts becoming increasingly common and company names like Wonga becoming familiar.

But such loans are also highly controversial. The lack of credit checks means many borrowers may be people whose ability to pay back the loan has not been properly assessed. Indeed, some of those turning to such lenders might be consumers who have been turned down by mainstream credit providers precisely over this issue.

And a greater concern has been the often astronomical interest rates applied to payday loans, with APR's of over 2,000 per cent in some cases. Those who do manage to pay the money back by their next payday may manage. But those who do not face penalty charges and soaring debt interest that may be crippling. 

This has led to many consumer groups arguing that such loans should be curbed and the first steps towards this may have been taken with the announcement by the Office of Fair Trading (OFT) that it is to formally investigate the issue.

It stated that one of the main reasons for the investigation is a concern that payday lenders "may be taking advantage of people in financial difficulty". This will see such companies tested against the OFT's own criteria for responsible and irresponsible lending.

Failures to check ability to pay before issuing a loan, claims that certain vulnerable groups are inappropriately targeted, the rolling-over of loans that makes repayment unaffordable and unfair treatment of borrowers who are in trouble are all issues the study will concentrate on.

OFT director of consumer credit David Fisher said: "We are concerned that some payday lenders are taking advantage of people in financial difficulty, in breach of the Consumer Credit Act and not meeting the standards set out in our guidance on irresponsible lending. This is unacceptable."

He added that an investigation would be timely in view of the rapid expansion of the payday loan sector in the last couple of years.

And the possibility of legislative action over the issue was raised by consumer affairs minister Norman Lamb, who remarked that the findings of the OFT study may be "used to take further enforcement action and drive up standards within the industry."

Consumer groups have widely welcomed the move. Citizens Advice chief executive Gillian Guy said the review is needed "urgently", as the last two years have seen a fourfold increase in the number of consumers seeking the organisation's help over such loans.

"Worryingly, more and more people are being treated unfairly, being offered loans they can't afford to repay and put onto rollover loans with huge interest rates and charges," she remarked.

Other endorsements of the OFT move included that of Consumer Focus. Its director of financial services Sarah Brooks said the organisation's own investigations have shown "inadequate affordability checks" are rife and customers are frequently being encouraged to roll loans over, with the situation "getting worse not better".

So it may be hoped that the result of the OFT investigation is that the practices of payday lenders that can lead many consumers into deep and unpayable debt will be curbed. In the meantime, however, many more people could fall foul of such borrowing.

Posted by Paul Thacker