Unless you live your life without TV, you will have noticed the rocketing trend for payday loan companies and their promotional tactics of TV advertising. It was only last night that a company advertised their payday loan services in a prime time evening slot, their selling point that you, the customer, could have your cash deposit in your account a mere 10 minutes after applying. You cannot help but wonder how this is ethically possible and that perhaps it seems too good to be true. Certainly average households are facing more and more financial challenges thanks to the shrinking economy and the tempting offer of a cash deposit within minutes is perhaps one that is too difficult to resist? Well, significant moves by the Office of Fair Trading (OFT) this month may put a stop to this as they are implementing stricter rules for payday loans adverts.
The payday loan industry is huge at present thanks to the current economic situation. It is estimated that the number of payday borrowers has increased year on year since it reached 1.2 million in 2009. In fact the industry is predicted to outgrow the credit card industry such is its popularity and growth. Parallel to the growth of the industry is the increase in calls to the national debt counselling service. It has increased from 150 per month to 1100, from people who have signed up to payday loans.
Payday lenders are finance companies who lend relatively small amounts of cash to people under the proviso that they make the repayment by the following payday i.e. within 28 to 31 days. The advantages to the customer are that it is an accessible service (i.e. over the internet), there are no credit checks so people with bad credit history can still apply and that the entire transaction is a speedy process taking anything from 10 minutes to 24 hours for the cash to be deposited into your bank account.
The disadvantages to the consumer however are that they are charged high levels of interest i.e. APR, which means that if they postpone the repayments by even a month, the debts can start spiralling and become harder and harder to repay. For example an average APR is 1737% therefore to borrow £200 for one month costs £50. To borrow for two months costs £100, a total repayment of £300. Therefore you can see how easily the debt mounts up. Furthermore, payday loan companies often have hidden charges i.e. charges for admin fees, rollover fees and signing up fees. If these are not declared at the outset, customers feel that they have been mis-sold the product and results in debt and customer complaints. Some payday loan companies can be very vague about how they make these charges and how much the loan will cost the consumer which leads to questionable advertising.
It is these secretive terms and conditions which result in unsuspecting customers accumulating mounting debts that have led to growing complaints and have prompted the OFT to audit the industry.
The (OFT) has surveyed the UKs 50 biggest payday loan companies and their websites to evaluate what they are advertising and if it is ethical. They identified four key areas of criticism:
• The lack of clarity in interest rates of short term loans
• Targeting vulnerable customers
• The lack of credit checks
• The promotion of unnecessary spending
In addition to this the OFT have spoken with consumer organisations, charities including Shelter and MPs to determine if these companies are complying with the Customer Credit Act in regards to irresponsible lending. Currently the guidelines are:
“Inappropriately encouraging borrowers to increase, aggregate or rollover existing debt to unsustainable levels.”
High profile examples of breaking these guidelines include the payday loan company Wonga who deliberately targeted university students with their short term loans, encouraging them to use them for flights to the Canary Islands. The APR on these loans was 4214%. Another example is as far back as 2012 when the payday loan company Tooth Fairy Finance was warned by the OFT for its huge charges for debt collection. This is another example of trying to take more money off people that simply do not have it.
The industry has been accused of not checking the affordability of the loans against the person making the request. This has resulted in customers borrowing a sum of money to consolidate other payday loans but the implications are that this customer owes significant amount of interest to all of their payday lenders. This is a grave situation for the customer as the debts easily spiral. If there had been adequate affordability checks made in the first place, this customer should never have been permitted the loan.
In February 2012, the OFT launched an extensive audit of the industry based on these findings of irresponsible lending. Historically, even when one company has had its licence revoked, they have rebranded and launched themselves under a different name. The OFT is now taking steps to monitor this and clamp down on these bad practises and put rules in place that protect consumers.
There is great relief in the finance industry that the OFT have made this announcement. Hopefully it will rationalise the industry, eliminate the bad practises and allow those companies that are honest and provide a good service to flourish. There is absolutely a place in the market for bone fied payday loan businesses that meet trading standards to provide a good and fair service.
Oliver Carding is an experienced content writer and SEO consultant based in the United Kingdom. His current project fast pay day loans review aims to provide consumers with unbiased and informative advice about the unregulated pay day loans industry.