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New Consumer Focus research highlights the need for better controls on payday lending
Payday lending is a form of credit whereby a borrower either gives the creditor a cheque or authorisation to make an automatic withdrawal from their bank account. The payment is used as security for a short term loan to be repaid, typically, on their next payday.
According to research carried out by Consumer Focus the number of people taking out expensive payday loans has quadrupled since 2006 to 1.2 million people, borrowing a combined £1.2 billion per year. 'Keeping the Plates Spinning', estimates that two thirds of payday loan borrowers have a household income of less than £25,000 and on average take out 3.5 loans typically of £294 per loan.
Evidence suggests that a typical payday loan costs around £20 for every £100 borrowed, and if the loan was deferred or "rolled over" for six months the cost of repaying the loan would rise to as much as £660, generating APRs in the region of 1000% to 2000%. The report makes a number of recommendations for tighter regulation of the payday loans industry including:
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Payday lending is a form of credit whereby a borrower either gives the creditor a cheque or authorisation to make an automatic withdrawal from their bank account. The payment is used as security for a short term loan to be repaid, typically, on their next payday.
According to research carried out by Consumer Focus the number of people taking out expensive payday loans has quadrupled since 2006 to 1.2 million people, borrowing a combined £1.2 billion per year. 'Keeping the Plates Spinning', estimates that two thirds of payday loan borrowers have a household income of less than £25,000 and on average take out 3.5 loans typically of £294 per loan.
Evidence suggests that a typical payday loan costs around £20 for every £100 borrowed, and if the loan was deferred or "rolled over" for six months the cost of repaying the loan would rise to as much as £660, generating APRs in the region of 1000% to 2000%. The report makes a number of recommendations for tighter regulation of the payday loans industry including:
- Limiting the number of loans that can be taken out or rolled over to five per household annually;
- Payday lenders should share information to avoid people borrowing from multiple lenders simultaneously and develop an industry code of practice; and
- Alternative affordable credit from banks and social lenders such as credit unions to be further encouraged and promoted by both the financial services industry and the Government.
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