Posted: Mon 25th Nov 2013

Payday loan cap needs to be coupled with more choice for consumers

News and Info from Deeside, Flintshire, North Wales
This article is old - Published: Monday, Nov 25th, 2013

As the Government announces a cap on the cost of a payday loan, Citizens Advice highlights the need for reforms in the market and for banks to offer an alternative, such as a short-term micro-loan.

Payday loans composite ‌​‌‌‌​‌‌‍‌​‌‌‌​‌​‍‌​‌‌‌​‌​

Citizens Advice Chief Executive Gillian Guy said: ‌​‌‌‌​‌‌‍‌​‌‌‌​‌​‍‌​‌‌‌​‌​

“This is a cap on the exploitation of people struggling with the rising cost of living. Payday lenders have failed to stick to their own promises to treat customers fairly. The Government’s plan to cap the cost of loans only goes to show how out of control the industry is. ‌​‌‌‌​‌‌‍‌​‌‌‌​‌​‍‌​‌‌‌​‌​

“The extortionate interest rates, hidden charges and lack of financial checks have pushed many payday loan customers into serious financial hardship. As our new figures out today show, three in four people who take out payday loans get into difficulties. ‌​‌‌‌​‌‌‍‌​‌‌‌​‌​‍‌​‌‌‌​‌​

“Citizens Advice has always been clear that any cap on payday loans must be a cap on the total cost of credit. Limiting interest rates alone would allow lenders to pile on excessive costs elsewhere, so the Government is spot on in deciding to tackle the overall cost. Ministers also need to look at opening up the market so there is more choice for consumers. ‌​‌‌‌​‌‌‍‌​‌‌‌​‌​‍‌​‌‌‌​‌​

“To truly tackle the cost of payday loans, there needs to be more competition in the payday loan industry. As it stands lenders are competing on the speed of loans as opposed to actual costs. Banks are still shunning their responsibilities to offer their customers alternatives to payday loans. The Government needs to put pressure on traditional lenders to introduce responsible short-term micro-loans. ‌​‌‌‌​‌‌‍‌​‌‌‌​‌​‍‌​‌‌‌​‌​

“Government must also tackle the underlying need for payday loans and ask – what is driving people to short term credit in the first place? The squeeze on living standards has caused a boom in payday lending as people turn to short-term loans to cover emergency costs and in some cases pay for everyday essentials. Rising energy prices, food costs and shrinking incomes means that more and more people will turn to short-term credit to help them get by.” ‌​‌‌‌​‌‌‍‌​‌‌‌​‌​‍‌​‌‌‌​‌​

Evidence from Citizens Advice reveals irresponsible lending is intrinsic to the industry and despite promises 12 months ago by lenders that they will clean up their act, they have failed to improve. ‌​‌‌‌​‌‌‍‌​‌‌‌​‌​‍‌​‌‌‌​‌​

New 12month figures from the national charity’s payday loan tracker, published today, reveal 62% of loans still come without proper checks to assess whether borrowers can afford to repay. It also finds 3 out of 4 borrowers found it difficult to repay their loan. In 84% of cases lenders broke their promise to freeze interest and charges for those who say they are struggling. ‌​‌‌‌​‌‌‍‌​‌‌‌​‌​‍‌​‌‌‌​‌​

Twelve month findings from Citizens Advice payday loan tracker are below. This is from customer feedback on over 4,000 payday loans from over 100 different payday lenders which was provided by between 26 November 2012 and 18 November 2013. ‌​‌‌‌​‌‌‍‌​‌‌‌​‌​‍‌​‌‌‌​‌​

Citizens Advice survey questions to gather evidence on compliance to the code Loans that  did not comply
To make clear how much a loan will cost in total 21%
Explain how the loan will be repaid 17%
Establish if the borrower can afford to pay back the loan 61%
Ask the borrower to provide documents to prove they can afford to repay the loan 88%
Warn that a payday loan should not be used for long-term borrowing or to deal with money troubles 57%
Explain how to make a complaint 81%
Make it easy to contact them if the borrower is struggling to repay 54%
When people are having difficulty repaying, treat them sympathetically 83%
Freeze interest and charges for people struggling to repay loans 84%
Tell borrowers that free debt advice is available from charities 91%
Don’t put pressure on borrowers to extend loans 70%
Highlight the risks of extending a loan 82%
Explain costs of extending a loan 64%
Check borrowers could afford to pay back the loan if it was extended 94%

images via the Guardian ‌​‌‌‌​‌‌‍‌​‌‌‌​‌​‍‌​‌‌‌​‌​

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