The watchdog Consumer Focus has produced some startling and worrying figures this week about the thorny issue of payday loans. The figures show that the number of people using the payday facilities has risen by 400% since 1996.
The figures have prompted the watchdog to call for more safeguards to protect potentially vulnerable borrowers from interest rates which can soar to an astronomical 2,500% per year.
1.2 million people are now taking out payday loans every year, borrowing a total of £1.2bn in the UK. In the USA, the total is over $2 billion according to industry sources at AdvanceLoan.net.
For many people a payday loan is a quick and efficient way of getting hold of short-term credit. If the money is paid back promptly on the next pay day, this type of lending can be cheaper than paying an unauthorised overdraft or a credit card charge.
The problem is that if the loans are rolled over, debts can quickly escalate.
The payday loan industry makes the valid point that, when managed properly, many people find this type of lending easy to understand and less risky.
There is a reluctance among many consumers to take on long term loans from traditional lenders, because they feel their financial situation could change. But they find that the short term credit offered by the pay day loans industry does meet their needs.
Payday loans are a valid form of credit however, analysts believe that there needs to be a limit on the number of loans people take out and how many loans they are able to roll over.
Consumer Focus has now joined forces with the Consumer Credit Counselling Service (CCCS) to find out how to help borrowers who fall into problems with the first suggestion being that traditional banks could do more to provide the short term credit people need.
The British Bankers Association (BBA) has been quick to move against this claiming its members are already being as flexible as they can. A spokesman said that banks ‘have to make a risk assessment on every lending proposal they receive and quite frankly it does not do any good to lend money out to people if they can’t afford to repay it’. He has a point.
However, this lack of traditional options means that, for many people, a payday loan is still the only legal option for short term lending, when money is tight and there is nowhere else to turn. Although they are not recommended, payday loans are still preferable to using loan sharks.