As more consumers turn to high-cost credit, payday loans are fuelling consumer debt problems, according to new research.
The survey by debt charity Debt Advice Foundation (DAF) found that 41% of those struggling with debt claim their financial problems are the result of high-interest ‘payday’ lending. At the same time, online searches for ‘payday loans’ have doubled in the past 12 months, suggesting rapid growth in the sector.
The research comes just weeks after a Which? Money investigation into payday loan companies found widespread poor practice, with some companies automatically offering consumers bigger loans each month. Other companies offered what we believe to be inappropriate ‘rollovers’, whereby repayment of the loan can be deferred for several months in exchange for a high monthly interest charge. One major payday loan website we looked at was even operating without a consumer credit licence.
Payday loans widely used for food and essentials
The DAF research found that one in four people who had taken out a payday loan needed the money to buy food or essentials for their household, with 44% using them to pay off other debts.
Almost half (49%) of those who had used this type of credit felt they hadn’t been fully informed about the rate being charged and the total amount they would pay back.
David Rodger of the Debt Advice Foundation commented: ‘Many lenders are quick to point out that an APR is not an appropriate measure for these types of short-term products and that most borrowers are happy with the cost of the credit in monetary terms. However, for those who exceed the loan period, these high interest rates can rapidly transform a relatively small and manageable debt into a much larger liability.’
If you’re struggling to pay back a payday loan, read our guide for what to do next.
Lack of credit checking
The charity also has concerns about the lack of credit checking. Rodger continued: ‘Many payday loan companies actually advertise the fact that they don’t check a borrower’s creditworthiness, which can result in people accumulating multiple unaffordable high-interest debts. We believe lenders should be obliged to inform credit reference agencies when a loan is taken out and check whether an applicant has any current outstanding liabilities.’
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 practice by some payday loan providers risks leaving many consumers vulnerable to unmanageable problem debt.
‘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