Margaret Lynch: A new CAB scheme may help with the problem of pay-day loan firms

PAY-DAY loans can seem ­tempting. A quick and easy application process and the promise of money in your account within minutes may seem like Christmas has come early.

But evidence from Citizens Advice Bureaux (CAB) from across Scotland illustrates the financial hangover that consumers are left with once the money is spent.

The pay-day loan industry has grown significantly in recent years – the £1.7billion-a-year ­industry has increased five-fold since the start of the recession in 2008. This huge increase is largely down to three main reasons.

First, almost half of the population struggle financially to make it to pay day. The cost of food, travel, and heating our homes is at a premium, and shows no signs of decreasing.

Second, consumer credit has become harder to access and the borrowers on lower incomes who would have previously dipped into their overdraft or increased their credit card limit have little or no option but to turn to high-cost credit options such as pay-day loans.

Finally, the speed at which these loans can be accessed makes them a very attractive option. In contrast to other forms of credit and emergency sources of income, such as the Social Fund, payday loans can be in your account within 15 minutes.

As the pay-day loan industry continues to grow, so do the number of Scots coming to ­Citizens Advice with negative experiences of pay-day lenders. In the last 12 months the number of unsecured personal loan debts advised on at bureaux has increased by 20 per cent, compared with an 8 per cent fall in credit card debt issues.

In the last six months our clients have sought advice on 50 new unsecured personal debt issues per day.

We are seeing people being given loans that are clearly unaffordable and inappropriate for their circumstances. With up to 4,000 per cent interest and huge default charges, payday loans are not suitable as a long-term debt solution, but we see clients with ten, twenty, even thirty different loans at one time and no means of repayment.

A major problem for our ­clients is the use by lenders of Continuous Payment Authorities, which give the company permission to take funds from the customer’s account to repay the loan. But without notice of a pre-agreed repayment amount, this practice is having a devastating effect on the budgets of those already struggling to ­afford everyday essentials such as food, rent, and energy bills.

So, while pay-day loans may meet the needs of some consumers, many others find themselves in greater financial hardship as a result of the poor policies and practices which the industry ­appears to be riddled with.

Until recently, with no statutory regulation, the most vulnerable in our society have been at the mercy of these often ­unscrupulous lenders.

However, following recent political pressure and increased concerns from advice agencies and debt charities, from the 26 November 2012 the four main trade associations covering 90 per cent of pay-day lenders will commit to a new good practice charter. This long overdue ­charter aims to give customers enhanced protections when ­taking out a pay-day loan.

We welcome the lenders guarantee that they will conduct sound and responsible affordability assessments, and ensure their customers understand ­interest rates and repayment procedures to avoid the desperate situations that many borrowers are facing on a daily basis.

We all know that consumer credit can be a minefield – with a huge range of choices, different interest rates, and complicated terms and conditions – and it is a lender’s responsibility to ­ensure that their customers know and understand what they are ­signing up for.

In order to monitor the lenders and make sure they are sticking to their side of the deal, Citizens Advice Scotland is launching a new campaign on Monday.

We will be asking pay-day loan customers to help us monitor the lenders by telling us if they are complying with the new charter. We will use this ­evidence to work with trade bodies and regulators to ­highlight where lenders are not complying with the guidance.

As well as gathering evidence on any bad lending practices, we’ll also support customers in their complaint if they have been treated unfairly.

• Margaret Lynch is chief ­executive of Citizens Advice Scotland. www.cas.org.uk