The study also found that around 50 per cent of borrowers who use payday loans are not easily able to satisfy repayment criteria, while a third knew that they would be unable to pay off the debt when applying.
Richard Lloyd, the executive director of Which?, stressed that the Office of Fair Trading (OFT), “must do more to clamp down on irresponsible lending.” Mr Lloyd suggested that imposing more stringent lending criteria on payday loan customers would be a step in the right direction for the industry, which needs “better affordability assessments” and “clearer charges.”
The Which? report revealed that while 34 per cent of payday loans are used for emergencies (compared to 47 per cent of credit cards), 32 per cent are used to clear regular household bills. Twenty per cent of payday loans, which can attract APR of more than 4,000 per cent, are used to pay for rent. Worryingly, 24 per cent of borrowers use the loans to satisfy other debts.
Mr Lloyd commented: “It’s shocking that half of all people taking out payday loans have been unable to pay the money back and it’s a depressing sign of the times, that almost a third were hassled by debt collectors in the past year and one in five said they had been hit with unexpected charges.”
People who have been caught out by payday loan charges will appreciate the problems facing low-income households in the present economy. Payday loans are not intended for any purpose other than emergencies, so borrowers really ought to avoid using short-term, high-interest loans to cover existing debt. If debt problems spiral out of control, options such as bankruptcy, debt consolidation loans or debt management plans, should be discussed with a responsible financial adviser.