One million UK families are being forced to take out payday loans every month as they struggle to meet the rising cost of living, new research revealed last week.
A poll for Which?, the consumer organisation, shows that almost 400 000 of them use the high-cost loans to pay for essentials such as food and fuel, while 240 000 need the money to pay off existing credit.
Half of the people who take out payday loans find they can’t cover the cost of repayments – which can attract interest rates of more than 5 000 percent – which means they are forced to take out new credit and spiral further into debt.
The figures were revealed ahead of a summit last week between ministers, lenders and consumer organisations designed to tackle the problem. But the government is refusing to push for a cap on the total cost that a person can owe a firm, one of the key demands by Stella Creasy, the Labour MP who has gone to war with Wonga and other “legal loan sharks” in the £2 billion (about R31bn) sector.
Ministers insist that research shows a cap could actually punish people borrowing money because loan firms would simply increase their repayment charges, using the capped figure as a target.
Despite her campaigning efforts, Creasy was not invited to the summit in Whitehall, which was hosted by Jo Swinson, the Consumer Affairs Minister. There were suggestions that Creasy’s vocal support for the cap, which is against the government’s policy, was behind her being excluded from the talks.
A week ago George Osborne, the Chancellor of the Exchequer, was accused of pushing people into the arms of Wonga and other payday lenders after he announced plans to force the unemployed to wait seven days before claiming benefits.
The poll by Which? found that 4 percent of people, equivalent to 1 million households in the UK, said they had taken out a payday loan in the last month. Some 38 percent of people who do so use them to pay for food and fuel, while 24 percent repay existing payday loans.
A total of 79 percent of people, about 38.5 million adults, use some form of credit, while 44 percent are worried about their household level of debt.
Seven in 10 of payday loan users regret taking out credit in the past, while 49 percent found they couldn’t meet the high cost of payments, and 28 percent said that, while they didn’t like being in debt, they saw it as a necessary part of their life.
Nine out of 10 people believe payday loan companies should always include the cost of borrowing in advertising, while 87 percent think the ads should make clear that it is possible to get free help from a debt advice organisation.
A spokesman for the debt charity StepChange said: “These findings are alarming and reflect what the charity is seeing. Credit should never be used to pay for essential living costs, and the fact that so many are using it this way points to a wider problem in the economy.
“This is particularly the case with high-cost credit and underlines why action is needed to tackle the problems in the payday loan industry.”
Richard Lloyd, the executive director of Which?, said: “Payday lending is dogged by poor practice yet people are increasingly turning to this very high cost credit to cover essentials or pay off existing debts.
“A clear message has been sent to lenders to clean up their act, but the regulator must back this up by enforcing proper affordability checks and punishing lenders who flout the rules. We also want more action from the government.”
Which? urged regulators to create new rules banning excessive charges, a restriction on the number of times a payday loan can roll over and clearer advertising.
Payday loans from companies such as Wonga and QuickQuid are easily taken out by people with poor credit histories who often have nowhere else to go for cash to pay bills – people who are often among the least well-off in society.
While the repayments and interest on a month-long loan may be initially small, borrowers get into trouble when they cannot pay back on time, or have to roll over the credit. What starts off as a small amount can spiral into tens of thousands of pounds.
A week ago the Competition Commission launched an investigation into payday loans companies, after a referral from the Office of Fair Trading. From April the Financial Conduct Authority, which replaces the Financial Services Authority, will have the power to impose fines on firms and order compensation to be paid to customers.
A Whitehall source confirmed that Creasy had not been invited to the summit, but that Swinson had said she would meet the Labour MP afterwards.
The source said: “The summit is not about politics, it is about bringing regulators and trade industry bodies, lenders and government together. Her [Creasy’s] particular views, which are very much focused on a cap, might inhibit a full and frank discussion between all sides.”
David Rodger, the Debt Advice Foundation chief executive, said the Which? proposals “will go a long way towards reining in the worst excesses of this sector”. – Jane Merrick from The Independent on Sunday