Struggling Scots are turning in rapidly growing numbers to payday lenders in a bid to ease their debt burdens, alarming new research shows.
A leading charity today reports a sharp rise in the first part of this year in the number of clients north of the Border with payday loan debts, which now average out at more than £1,600.
The figures come as MPs warn that the Office of Fair Trading (OFT) had failed in its duty to protect consumers from “predatory” payday lenders.
The recent spike in payday loan debts in Scotland is illustrated once more in an update from the StepChange Debt Charity. It revealed that more a quarter of those contacting it for help with debts in the first three months of this year had taken out payday loans, which have annual interest rates of up to 4,200 per cent.
The proportion has risen from 15.6 per cent in 2012 and is nearly three times the amount of clients with payday loan debts just two years ago. In 2009 only 2.2 per cent of StepChange clients in Scotland had taken out payday loans.
The scale of payday loan arrears has risen dramatically too. In 2009 the average payday loan debt among StepChange clients in Scotland was £919, climbing to £1,044 the following year. In the early months of this year the average amount owed to payday lenders hit £1,613, more than £400 higher than just two years ago.
The biggest increases in Scotland have been in Aberdeen and Dundee, where four in ten debtors seeking help from StepChange in early 2013 had taken out payday loans. The number in Dundee has jumped from just 15 per cent last year.
In Edinburgh the proportion of its clients with payday loans rose from 18 to 25 per cent in the first quarter of this year, with an average debt of £1,443.
Sharon Bell, head of StepChange Debt Charity Scotland, said: “The dramatic rise in problem payday loan debt in Scotland is alarming as this type of debt is expensive and can quickly spiral out of control. Regulators are taking some action but there are still widespread problems across the payday loan sector.”
But that regulatory action was yesterday dismissed by MPs as “ineffective and timid in the extreme”. The OFT, which has the power to revoke or suspend the credit licences held by payday lenders, was accused by the public accounts committee (Pac) of “passively” waiting for complaints before acting. Pac chair Margaret Hodge said: “It has never given a fine to any of the 72,000 firms in this market and very rarely revokes a company’s licence”, though the OFT has acted against a handful of lenders since March.
Consumers are losing £450 million a year to unscrupulous payday lenders, the Pac report estimated. It said the firms were targeting people on low incomes who had been squeezed out of the mainstream banking market.
Responsibility for payday lenders will pass next April to the Financial Conduct Authority, when it takes on regulation of consumer credit. In the meantime the onus is on consumers to get help before turning to payday loans: “It is crucial that anyone struggling to repay what they owe at the end of the month doesn’t just roll their loan over and rack up very high charges, but takes control and seeks advice from a debt charity instead,” she said.