Half of people with payday loans cannot afford to pay back their debts

New research from Which? has found:

  • Half (48%) of payday loan users have taken out credit that it turned out they couldn’t afford to repay.
  • A third (29%) of payday loan users have taken out credit that they knew they couldn’t repay.
  • In the last 12 months, more than half (57%) of people with payday loans have missed a payment and have incurred charges because of missed or bounced  repayments (56%).
  • 43% of payday loan users say it’s too easy to get credit.
  • Almost a third (31%) were hassled by debt collection agencies in the past 12 months.
  • One in five (20%) have been hit with unexpected charges.
  • Seven in 10 (69%) payday loan users say they have regretted taking out a loan or other credit product in the last year.
  • A quarter (27%) of payday loan users have sought debt advice in the last 12 months compared to just 5% of users of any credit product.
  • People who use payday loans (15%) are more likely to use advertising to help them choose a product than users of any credit product (5%).

What are people spending credit on?

Which? research found that payday loans are being used to pay for rent and regular household bills much more than credit cards, which tend to be reserved for emergencies and more extravagant purchases such as holidays. However, buying food and fuel are the top items that people are using both forms of credit for.

Item Payday loan Credit card
Essentials: food and fuel 38% 52%
Emergencies 34% 47%
Regular bills 32% 18%
Repay other debts 24% 11%
Rent 20% 6%
Holidays 11% 52%

Which? executive director, Richard Lloyd, said:

“It’s shocking that half of all people taking out payday loans have been unable to repay debts and it’s a depressing sign of the times that almost a third were hassled by debt collectors in the past year. Payday loans are leaving many people caught in a spiral of debt and taking out more loans just to get by. That’s when they’re hit by excessive penalty charges and roll over fees.

“The Office of Fair Trading must do more to clamp down on irresponsible lending by introducing tighter rules for payday lenders. Better affordability assessments and clearer charges would be the first steps to clean up the industry and better protect consumers.”

Which? is calling for:

  • More robust affordability assessments that take into account the borrower’s income, expenditure and their ability to repay the debt.
  • Affordability assessments to take place each time a borrower requests to roll over a loan or take out a new one.
  • Lenders to be clear and upfront about all extra charges and display them clearly on their website alongside the application process.
  • Lenders to do more to help customers in financial difficulty by freezing penalties and working out suitable repayment plans.
  • All extra charges to be fair and reflect the true cost to the lender. Excessive charges must be stamped out.

Notes to editors:

Populus, on behalf of Which?, interviewed a random sample of 4031 GB adults aged 18+ online between 10th and 12th August 2012.  Surveys were conducted across the country and the results have been weighted to the profile of all adults.

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