Payday loan costs push more into insolvency

THE use of costly payday loans has soared as financial pressures push households to the brink of insolvency, according to a report out today.

The number of Britons taking out payday loans has quadrupled in the last four years despite interest rates that frequently exceed 1,000 and even 2,000 per cent APR, Consumer Focus has revealed.

Its report, 'Keeping the plates spinning', estimated that the average payday loan is now 294, with payday loan borrowers taking out an average of 3.5 loans a year. It found that two thirds of payday loan borrowers have a household income of less than 25,000, and more than half are under the age of 35.

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The loans are used to meet short-term credit requirements and designed to be repaid on the borrower's next payday. However the cost of payday loans that are not repaid immediately increases dramatically. Interest charges typically range from 13 to 18 for every 100 borrowed, although some online lenders charge up to 30 for every 100.

Marie Burton, financial services specialist at Consumer Focus, said borrowers deferring repayments or forced to take out repeat loans were digging themselves deeper into debt.

"With the credit crunch, demand for short term borrowing has significantly increased despite the eye-watering interest rates charged by some payday lenders."

Bryan Jackson, corporate recovery partner with accountants and business advisers PKF, said the sharp rise in the number of payday loans taken out was inevitable.

"There is clear evidence that many people are only just surviving financially at the moment. Even a slight change in their circumstances will put many thousands of Scots over the edge and into insolvency."

And the extortionate interest rates charged are pushing borrowers closer to insolvency, he warned.

"Taking a payday loan is an almost certain first step toward personal insolvency and I would urge individuals to address the underlying issue of their overall financial state rather than make a bad situation even worse," said Jackson.

But Consumer Focus said an outright ban on the loans would leave borrowers prey to illegal loan sharks. Instead it has called for tighter controls on payday loans firms, including an annual limit on the number of short-term loans taken out or rolled out of five per household; more stringent affordability checks; and a code of practice for payday loan firms.

It also wants banks to provide access to affordable short-term loans to deter people from going to payday firms, with clear fee and charging structures.