Payday loan companies are out of control, says Citizens Advice

Payday loan companies are lending irresponsibly and harassing borrowers.

People aged under 18, those with mental health issues and borrowers who were drunk have all been given payday loans, according to Citizens Advice.  

It says these lenders are out of control and has urged the OFT to take “tough and immediate” action.

This news comes 12 weeks after the Office of Fair Trading (OFT) launched an investigation into the payday loans industry.

Out of control lending

Evidence from Citizens Advice showed that the payday loans industry is failing to meet basic lending standards.

It looked at 780 cases which had been reported and tracked feedback between 26th November 2012 and 17th March 2013. Within this feedback it looked at 2,000 payday loans which had been approved and 113 different lenders.

Several major flaws in the payday loan industry were highlighted through this research. It found that three out of every four people with a payday loan are struggling to repay the debt.

The checks used to make sure someone can repay a loan are still not sufficient - in 87% of cases a borrower wasn’t asked to provide documents to prove they could repay the loan.

Lenders have also been found to be taking more money - through interest payments - then they were owed and refusing to refund the extra.

Bank accounts of borrowers have also been emptied as the payday loan companies take direct debit payments, without informing the borrower, which is a misuse of Continuous Payment Authorities and often leaves people with no money to live on. Read Beware recurring payments and Continuous Payment Authority.

“The payday loan industry is out of control and is acting as a law unto itself. It has showed a complete disregard for its customers. Many have been driven into debt by irresponsible lending and their debts ballooned as lenders put pressure on them to extend the loans,” explained Citizens Advice chief executive Gillian Guy.

Rolling-over debts

One of the main areas where people get caught out with payday loans is when a debt rolls over and the interest rate shoots up.

Seven out of ten people who take out a loan say they’ve been put under pressure by the lender to extend the loan.

Reasonable repayment plans are also not being set up to help borrowers who are unable to repay loans. In 84% of cases lenders refused to freeze interest payments.

What's more borrowers are not being warned about the danger of extending loans. Citizens Advice found that 83% of the time lenders did not make the risks clear of extending the loan to those already in debt.

A massive 95% also didn’t check if borrowers who already had repayment problems could afford to pay back an extended loan.

Micro loans

Citizens Advice has called on high street banks to start offering micro-loans to people in debt. These would be a responsible alternative to a payday loan and far more accessible than the standard personal loans on offer.

The one positive to come out of this research is that lenders are now being more upfront about the costs they charge.

More on loans:

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The best alternatives to payday loans

What is a Crisis Loan?

The dangers of multiple payday loans

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