Why the payday loan industry needs cleaning up now

Payday loans cause widespread harm and misery, and we think greater reform of this industry is essential.

The payday loan industry isn’t doing enough and needs tougher rules to bring it into line. That’s what Mike O’Connor, our charity’s Chief Executive, said as StepChange released figures showing an 82% rise in the number of people coming to us for help with payday loans.

As the Financial Conduct Authority (FCA) are assuming regulation of consumer credit from April this year we believe that sorting out the payday loan industry should be top of their agenda from day one.

We’ve got a few ideas about how they can do it too.

Where are payday loans getting it wrong?

• Irresponsible lending: The average amount of payday loan debt for our clients is £1,647 and the average take home pay is £1,381. Owing more in payday loans than you’ve got in monthly income cannot be right. The industry should do more to make sure their borrowers have a reasonable chance of paying off their loans on time.
• Excessive interest and charges: We’re seeing lots of people coming to us with stories of huge amounts of interest being chucked on top of their debts. One man borrowed £200 to begin with and ended up owing £1,851 three months later.
• Multiple payday loans: Payday loans adverts suggest they are a way to cover a one-off short-term expense which you then repay a few weeks later. If that’s the case then there’s no reason why people should be allowed to rack up dozens of payday loans. Last year, 13,800 people came to us with five or more payday loans.

How can the FCA fix it?

We think the payday loan industry needs to shape up its act. When the FCA becomes the regulator they should use some tough love to get these companies to behave. Here are our suggested reforms to sort out the payday loan industry and here's what the FCA has so far announced it will be doing.

1. Better affordability checking

Payday loan companies should use a real-time data sharing system. This would mean they have access to up-to-the-minute details of their applicants’ existing payday loans. It would be an easy way for them to identify people with multiple payday loans and reduce the number of people taking out more debt than they can cope with.

What the FCA is doing: encouraging this data sharing

2.  Stop debts escalating

There needs to be a reasonable limit on the amount of interest and charges a payday loan company can add to an unpaid loan. We want to see an end to payday loan debts being artificially inflated by unreasonable fees.

What the FCA is doing: consulting on a cap on the cost of a payday loan

3. Limit rollovers

The cost of a payday loan really starts to mount up if you defer payment by ‘rolling the loan over’ for another month. We want to see payday loan limited to just one rollover. This will stop people using them as a crutch to struggle through, and avoid them building up extra debts.

What the FCA is doing: limiting the number of rollovers to two from July

4. Reform the way payments are taken

Payday loans are usually paid by something called a continuous payment authority (CPA), which involves taking payments from a bank card. If the money isn’t there to repay the loan we think that's evidence of financial hardship. We want companies to only be allowed to attempt taking payments again if they know it won’t cause financial difficulty for their customers.

At the moment companies often try to collect payments and completely empty a bank account. That’s why we often advise on how to cancel a continuous payment authority.

What the FCA is doing: limiting companies to two CPA repayments from July

5. Ban unsolicited marketing and reform advertising

Research conducted by YouGov for StepChange Debt Charity found that 26 million people in the UK had received texts or calls offering payday loans. We’d like this kind of unsolicited marketing banned. Most people just find it annoying but it can lead to genuine harm.

We’d also like to see payday loan adverts to come with a health warning that tells people about the risks of taking out high-interest loans.

What the FCA is doing: making companies provide 'health warnings' online and in marketing promotions from April, with a requirement this is extended to other advertising in July.

Are you having problems with payday loans?

If you’re struggling with payday loan debt then you can get help and advice by using our free Debt Remedy advice tool. It takes about 20 minutes and will provide you with a personal action plan to deal with your debts.

More on dealing with debt:

Six dangerous ways to borrow

Logbook loans: the loan that could cost you your car

Six signs you're caught in a debt spiral

What to do if your children are in debt