Payday loans ‘trapping people’

Some lenders still failing to check ability of borrowers to repay cash

PAYDAY lenders are being accused of “trapping people” by providing loans they cannot afford and struggle to pay back.

A study by Citizens Advice showed that some companies were still failing to carry out basic checks to make sure borrowers were in a position to repay their loans.

Payday loans are designed to give a financial boost to people between pay days. However, critics complain they have high interest rates compared to other financial products and can quickly get out of control.

Some reports have said that companies providing high-interest loans cost people in Glasgow as much as £20 million every year.

The Church of Scotland has been vocal about challenging payday loans and seeking more affordable options for people to access money quickly.

In January 2015, the Financial Conduct Authority (FCA) introduced a cap on payday loan interest rates at 0.8 per cent a day, fixed default fees not exceeding £15 and the overall cost never exceeding 100 per cent of the sum borrowed.

However, Citizens Advice said some lenders were still not carrying out checks on borrowers.

A survey of more than 400 people who had attempted to use payday loans revealed that one in four had not, or could not remember, being asked questions about their financial situation or ability to repay a loan.

The study found that half of these borrowers were still getting into difficulty while paying back their loans. And the number increases when looking at people who did not go through credit checks, with 78 per cent getting into difficulty compared to 40 per cent who did have checks.

Gillian Guy, chief executive of Citizens Advice, said: “Irresponsible behaviour by some payday lenders is trapping people with loans they can’t afford.

“New measures and guidelines from the Financial Conduct Authority have helped to clean up the market and the number of people turning to us for help has dropped significantly.

“But it’s clear some payday loan firms are flouting the FCA’s guidance and selling people loans costing hundreds of pounds that they struggle to pay back.

“The time has come for the FCA to turn its guidance into rules, forcing every single payday lender to carry out rigorous financial checks on potential borrowers to prevent people falling into deepening debt,” she added.

A spokeswoman for the FCA said it would be reviewing how lenders had responded to the cap in the first half of next year.

However, Russell Hamblin-Boone, chief executive of the Consumer Finance Association, which represents short-term-loan firms, said the report was not representative of the industry.

He added: “It is unfortunate this report fails to acknowledge the significant changes in the regulated short-term lending sector and we don’t recognise the picture of the industry it paints.”

‘‘ It’s clear some payday loan firms are flouting guidance and selling people loans costing hundreds of pounds