A NEW code of conduct for companies that operate payday loans comes into effect today, as Citizens Advice Scotland (CAS) says it is now seeing 50 new cases a day involving the short-term lending industry.
CAS says it will be watching lenders “like a hawk” to ensure they adhere to the new voluntary code, which calls on lenders to act fairly and reasonably and to carry out proper credit checks on customers.
Advice workers across Scotland report a 20 per cent rise in cases of people struggling to repay payday loans, which can incur interest rates of up to 4,000 per cent.
Margaret Lynch, chief executive of CAS, said: “The way payday and short-term lenders currently operate is very poorly regulated, and as a result we see huge numbers of people getting into unmanageable debt.
“In the last year, [CAS] advisers have seen a 20 per cent rise in the number of cases involving unsecured personal loan debts. In the last six months we’ve seen 50 new cases every day.
“Payday loans can seem very attractive to someone who needs money fast. But the trouble is that they often have massive rates of interest, sometimes up to 4,000 per cent. So the amount quickly spirals out of the borrower’s control.
“The important thing about today is that from now on people who take out a loan have a clear set of rights, and lenders have a clear set of responsibilities. We will be watching like a hawk to make sure all lenders stick to this code, and we will be waiting to help any borrowers exert their rights if necessary.”
The voluntary code of conduct, which was announced in July, has been agreed by four trade associations, representing more than 90 per cent of the payday loan industry.
Lenders have agreed to give customers clear information about the way a payday loan works and an example of the price for each £100 borrowed. They have promised customers will not be pressured into taking out a loan and will freeze interest if a customer is in financial difficulty.
The voluntary code has been introduced by the industry as an alternative to legislation to restrict the practices of payday lenders. However, consumer organisations believe further regulation may be necessary.
Which? executive director Richard Lloyd said: “The revised code largely amounts to a re-brand of many of the existing rules that have been flouted by unscrupulous lenders for years.
“If this code is to be worth the paper it’s written on, far more needs to be done to enforce the rules and protect vulnerable people who are getting caught in a downward spiral of debt.
“We welcome more robust affordability checks but also want to see a cap on the amount that lenders can charge for defaults and an end to extortionate fees.”
The Office of Fair Trading (OFT) said last week that several payday lenders are facing formal investigations over the use of “aggressive debt collection”.
The OFT is also writing to all 240 lenders in the market to outline its concerns about poor practices in the sector.
It expects to warn the majority of 50 firms it has inspected, which account for the lion’s share of payday loans, that they risk enforcement action if they do not improve their standards.