Payday loans can lead to spiral of debt, report warns

A THIRD of people who have taken out payday loans have run into even greater financial difficulties as a result, a new report has revealed.

People struggling to stay on top of their debts are turning in growing numbers to payday loans to buy essential items such as food, nappies and petrol, with around six in ten using the money to cover regular bills and household costs, according to research by consumer group Which?.

It warned that more households are being caught in a downward spiral of debt after being hit by interest “rollover” charges when they can’t repay their loan on time.

A fifth are unable to pay back their loan on time, while nearly half are forced to rollover their loans at least once, incurring extra charges in the process. Nearly six in ten payday loan customers are being encouraged to take out further loans.

Which? also found that one in four payday loan users have suffered hidden charges, such as fees for reminder letters.

The group, which investigated 34 payday lenders as part of its research, found late payment charges reached £150 for loans repaid just ten days late. Yet few of the firms make it clear that those defaulting on their loans face heavy charges.

A quarter of the companies don’t carry out credit checks on customers to ensure they are capable of repaying their loan and two-thirds of applicants are never asked about their financial situation, other than their salary.

Which? has called on the Office of Fair Trading - which is investigating payday loan firms - to do more to clampdown on the charges levied on borrowers who default.

Richard Lloyd, executive director of Which?, said: “With 1.2 million people taking out a payday loan last year, it is unacceptable for this rapidly growing number of people to be inadequately protected from extortionate charges and dodgy marketing techniques. At its worst, this booming £2 billion industry can be seriously bad news for borrowers who are struggling to afford food or pay their bills.”