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Are ‘payday loans’ as straight talking as they claim?

Brian Milne

Ever since the onset of the credit crunch individuals have been struggling to access credit. Despite technically leaving recession, there is no sign that the amount traditional lending by banks is improving. Whether this is because banks won’t or can’t lend is a matter for another day, however the by- product of this lending drought is the rise in alternative funders.

For individuals already in financial difficulty, the payday lending market has grown from £900 million in 2008/09 to almost £2.2 billion in 2011/12. They are now used by 1.2 million people a year which, at an illustrative APR in some cases of over 5000% p.a, explains how lucrative the market is.

The rise of payday lenders, along with their high interest rates, has resulted in a recent investigation into the industry by the Office of Fair Trading (OFT), which found that one third of payday loans were either repaid late or not at all. 28% of loans issued in 2011/12 were rolled over at least once, accounting for almost 50% of revenue.

Given the disproportionate levels of revenue generated by rolling over the loans, it’s not surprising that payday loan companies are allegedly relatively unconcerned about considerations of affordability and ability to repay debts. The conclusion of the OFT report is worth quoting directly: “the evidence suggests that many consumers are in a weak bargaining position, and that firms compete on speed of approval rather than on price... firms describe and market their product to consumers as one-off short term loans, but in practice around half of their revenue comes from loans which last longer and cost a lot more because they are rolled over or refinanced.”

West End Life Magazine | 41

The Continuous Payment Authority (CPA) is the most common way to pay back a payday loan. By providing details of the debtor’s bank debit card, the lender can withdraw money directly on the agreed date. If there are insufficient funds on the agreed date, the lender may keep asking the bank for all or part of the money, along with any relevant charges. If you are struggling to repay a debt to a payday loan company, the OFT suggests cancelling the CPA with your bank, which will give you back control of your funds in your account. Then, by taking independent debt advice, you can work out the best solution going forward. It is worthwhile pointing out that, where an adviser is appointed, the OFT states that it’s unfair or improper practice for the lender to continue to contact the debtor directly. Brian Milne is a partner in the business recovery practice of French Duncan Chartered Accountants.

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