Payday loan firms face action on direct debits

Payday loan firms are putting customers at risk of deeper debt difficulties by taking money out of their bank accounts without telling them, it has emerged.

Consumers repaying payday loans by direct debit have been warned to check their lender is taking the right amount on the right date after the Office of Fair Trading (OFT) clamped down on firms misusing payment facilities.

Payday loans are typically used to meet short-term borrowing requirements and are designed to be repaid on the borrower's next payday. Interest charges typically range from 13 to 18 for every 100 borrowed, yet the number of Britons taking out payday loans has quadrupled in the past four years, Consumer Focus revealed recently.

Some payday lenders use direct debit to give them greater control over the repayment of the short-term loan. But one firm, Safeloans, has been fined by the OFT for changing customer repayment details without telling them.

And the watchdog warned that Safeloans was just one of several payday firms who put borrowers who had defaulted on a payment on to a direct debit arrangement and then made multiple attempts to take money from their accounts without agreeing specific amounts or dates.

The practice of taking money from a debtor's account when they are already in difficulty could prevent them from meeting priority debts, such as mortgage payments, sending them further into debt, said the OFT. It also believes that some lenders use this "continuous authority" as a way to avoid having to make proper checks on a borrower's ability to repay.

Safeloans has now been ordered to take money from borrower accounts only on the dates set out in the loan agreement, unless otherwise agreed with the borrower in advance; and to change the repayment amount only if this has been also agreed in advance. Ray Watson, director of consumer credit at the OFT, said: "We have made it clear that we will not tolerate companies misusing repayment facilities and we will take action to ensure that unfair terms are not used. Those who offer payday loans must do so responsibly and in accordance with the expected standards."

Lucy McTernan, chief executive of CAS, said its advisers across Scotland regularly hear from people whose payday loan firm has taken funds from their account without telling them.

"In some cases this action took the customer into overdraft with their bank, which of course made them liable for hefty bank charges in addition to what they already owed the payday loan company, and so extended their debt through no fault of their own," said McTernan.

"Others were left unable to pay vital bills like rent, mortgage or food and fuel.

"This simply should not happen, and if the OFT is cracking down on the practice we support them 100 per cent," he concluded