Rise of the zombie debtor as 3.5m consider turning to payday loansDebt concerns reach a new peak, while saving falls
07 December 2011
New research reveals that 3.5 million adults are considering taking out a payday loan over the next six months.
The study by insolvency trade body R3 also shows that of those who had taken out a payday loan, 60% regret the decision and 48% believe the loan has made their financial situation worse. Only 13% believe their payday loan had a positive impact on their finances.
Frances Coulson, R3 President commented: 'Payday loans are not the best way to resolve debt struggles. We know that many who take them out find them to be a negative experience, often escalating financial troubles.'
Debt worries rise, while savings fall
The highest-ever levels of concern over debt were recorded in this quarter’s R3 Personal Debt Snapshot, with nearly two thirds (60%) of individuals worried about their debt levels. This is up 13% on July’s figure and up 21% on this time last year. In London this figure rises to 67%, but peaks at 70% in the North East where concern is at its highest.
R3’s research also reveals that saving is at a new low. The number of individuals with no savings at all has risen sharply from 19% last quarter to 27% this quarter. Overall, 40% of the population is saving less at the moment than usual.
Which? Money investigation into payday loan companies
We investigated leading payday lenders earlier this year and uncovered widespread poor practice including:
- Inappropriate rollovers: borrowers are encouraged to extend the term of their payday loan, often for several months. The R3 research also uncovered a new group of ‘zombie’ debtors - those who currently pay only the interest charges on their loan, credit card and overdraft debt, rather than the debt itself. One in six individuals are only able to pay the interest on their debt rather than paying off the debt itself.
- Unsolicited increases in the amount that can be borrowed: When our researcher took out a small payday loan, several were offered much bigger loans the following month, even though they had neither requested nor shown any interest in further loans.
- High APRs: Headline-grabbing APRs of around 1,700% are only half the story. Several payday lenders charge a fixed fee of, say, £25 per £100 borrowed, regardless whether you are borrowing for 14 or 31 days. For short repayment periods, the effective APR can easily reach 13,000%.
- Poor privacy provisions: In one case, within days of making his application our researcher had received 47 unsolicited emails and numerous phone calls from payday loan, impaired-credit and claims management companies.
Mainstream banking fails to cater for low earners
Which? debt expert Martyn Saville added: 'Payday loan companies are moving aggressively into a lending market that currently fails to cater for too many low earners and those unable to access mainstream lending.
'Unfortunately, poor lending practices by some payday loan providers risk leaving many consumers vulnerable to unmanageable problem debt. The new figures from R3 are incredibly worrying as zombie debt is unsustainable in the longer-term.
'If you're struggling to cope with your debts, it's a wise move to contact a free advice organisation such as Debt Advice Foundation, Consumer Credit Counselling Service (CCCS) or National Debtline for impartial advice. Your local credit union many also be able to help you borrow at an affordable rate.'
- Payday loans market rife with poor practice - read about the new Which? Money investigation
- Payday loans – designed to trap you in a cycle of debt? - have your say with Which? Conversation
- How to deal with debt - the best places to get free, impartial debt advice