Approximately two million adults in the UK have taken out a pay day loan in the past year and demand continues to rocket, providing lenders with headline making profits. The amount of money being borrowed by cash-strapped workers is reported to have tripled over the last 18 months to an average of £660.
Pay day loans aren’t illegal. They are advertised on the television, in newspapers and magazines and on the backs of buses. Payday loans offer a short-term borrowing solution (usually between £50 and £800) and by definition, should be paid back within 30 days (i.e. on your usual pay day). They are intended for essential one-off unexpected costs and are a very expensive way to borrow money due to typically high interest rates. Problems most often arise when the loan cannot be paid back over the initial short term and the debt is extended, meaning more fees and more interest.
Pay day loans should be a last resort for borrowing money. It is important to pause before you borrow money in any form and you should think hard about whether you really need to borrow money. In some extreme circumstances and only if you need money in a hurry, a payday loan may be cheaper than going into an unauthorised overdraft on your bank account if you can pay it back on time. It is always sensible to consider other options however, including an overdraft (or extension) or a limit increase on debit or credit cards which may be cheaper and on better repayment terms.
Watch out for Continuous Payment Authorities (CPAs). When taking out a payday loan it is common for the lender to set up a recurring payment on a debit card, but some vary the dates and amounts they claim from your bank account unlike the standard dates and amounts for direct debits or standing orders. You should make sure you understand how these payments work before agreeing a CPA. To stop a recurring payment you must contact the business that has your authority or your bank or credit card company and inform them that you have stopped permission for the payments to be taken.
If you are in debt:
- Don’t ignore it.
- Don’t suffer in silence – speak to a friend, financial or debt advisor or free confidential support or advice line such as the Money Advice Service.
- Take action. Speak to the organisations that you owe money to and tell them that you are having problems.
Incredibly, the Citizens Advice has found that 75% of customers who asked their pay day loan company for help had grounds for an official complaint to the Financial Ombudsman. Of 665 cases involving short term, high cost lenders it found: 20% were possible cases of fraud, where someone was chased by debt collectors over a loan they never took out; 33% involved lenders using CPAs to empty customers’ bank accounts without warning, and; 12% were bombarded with calls and texts after refusing affordable offers of repayment by lenders.
If you are unhappy with your payday loan company:
- Speak to them directly and inform them of your complaint or concerns.
- Report your case to the Financial Ombudsman, which found in favour of customers in 70% of recent cases.
Action is being taken. The Office of Fair Trading (OFT) has reported on a review of 50 leading pay day loans companies, 19 have stated that they are leaving the payday loan market (of which 4 have surrendered their licences). In addition, 3 firms have had their licences revoked after their appeals against OFT determinations were dropped or struck out.
Only by receiving complaints from the public can the OFT, the Financial Ombudsman and parliament take action against the high interest rates, misleading sales information and unfair terms that some of the pay day loans companies offer.