Payday loan problems still on the rise
In the first six months of 2014 the charity helped nearly 13,000 more people with payday loan debts than in the same period last year.
Between January and June the charity handled over £72m worth of payday loan debt that people were having difficulty repaying, up from £51m in the first six months of 2013.
The charity believes that the figures further highlight the large scale consumer detriment caused by the payday loan industry and the need for further and sustained action by the Financial Conduct Authority (FCA) to ensure better protections for financially vulnerable consumers.
The findings are released in conjunction with the charity’s response to the FCA’s consultation on a price cap for high-cost short-term credit in which it has highlighted a number of areas that require greater attention from the regulator.
StepChange Debt Charity chief executive Mike O’Connor said:
“Today’s figures show that the payday market all too often fails to treat customers fairly, especially those in financial difficulty.
“High-cost short-term credit is rarely the answer to financial difficulties. While, the FCA’s proposed price cap is a crucial step forward, there is still much work to be done to ensure that payday loans can no longer plunge people into a cycle of unsustainable borrowing and entrenched financial hardship.
“Consumers will continue to need access to short-term credit and FCA action should also stimulate the reform of this market. This needs to include problems in the adjacent markets including overdrafts, logbook loans and home credit where consumers also suffer detriment. The goal of an affordable lending market treating consumers fairly will also involve others but the FCA has a critical role to play in creating the right environment.”
100% total cost cap
StepChange Debt Charity believes there is a case for a tougher total cost cap than 100% of the value of the loan, especially in relation to higher value loans. The Competition and Markets Authority (CMA) found that the average initial payday loan taken out is £260, while the average StepChange Debt Charity client with payday loan debt has an income (net) of £1,305. This means that someone with just one payday loan debt which reaches the 100% cap would end up owing a substantial part of their income and could easily lead to further borrowing and deeper financial difficulty.
The FCA should mandate the participation of lenders in a real-time database. This ensures that lenders have up to the minute information on a borrower’s situation and is essential to helping address the problem of repeat and multiple borrowing. Last year, 13,800 people who sought the charity’s help in 2013 had five or more payday loans.
Default cost cap
The charity believes that there should be stricter limits on how much firms can profit from default fees and that the FCA should consider a separate cap on default costs. This would ensure that lenders do not automatically allow debts to reach the 100% cap as a matter of course and would encourage lenders to lend responsibly in the first instance.
Bring default fees in line with other sectors
The FCA has proposed a £15 fixed default charge, which is potentially high relative to the cost of a payday loan. The cap on default charges for credit cards is £12, which means there is a clear case for bring these fees in line with other sectors.
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