Payday loan debt problems halved thanks to new rules

Press Association
Wonga launches online pay service
Wonga launches online pay service

The number of payday loan problems being reported to Citizens Advice has nearly halved compared with a year ago.

Citizens Advice said it helped with 5,554 payday loan problems across England and Wales from January to March 2015, marking a fall of 45% on the same period in 2014, when 10,155 problems were reported.

The payday loans industry has undergone a huge clampdown since coming under the regulation of the Financial Conduct Authority (FCA) in April 2014.

In January 2015, a cap on the overall cost of a payday loan was imposed, meaning that borrowers who cannot afford to repay their debt on time will never pay back more in charges than the sum they initially wanted to borrow.

Compare 0% credit cards

Fears were raised by the FCA's predecessor body, the Office of Fair Trading, that some payday firms had appeared to base their business models around people who could not afford to pay back their loans on time, meaning the cost of the debt ballooned as they were forced to roll it over and extra fees and charges were piled on.

After coming under the FCA's supervision, payday lenders were banned from rolling over a loan more than twice and and they can only now make two unsuccessful attempts to claw money back out of a borrowers' account.

Citizens Advice welcomed the fall in payday loan problems but said it is important to keep a "watchful eye" on the industry.

It is also calling for other high-cost credit products, such as logbook and guarantor loans, to come under similar scrutiny.

Compare 0% credit cards

Someone taking out a logbook loan puts up their car as security. These loans have been compared with using a pawnbroker, in that full ownership of the car is retained until the loan has been paid off.

But issues reported to Citizens Advice around logbook loans include high interest rates, excessive fees and charges and aggressive behaviour when collecting debts.

Borrowers can take out a guarantor loan by getting a friend or family member to act as their guarantor. This means if the borrower cannot repay the loan the guarantor has to. But Citizens Advice said it has seen evidence that proper checks are not always being carried out around guarantor loans.

It highlighted one case it has seen where a Citizens Advice client took out a high-interest loan, with her sister as the guarantor. It said that when the client was struggling to make payments, the lender began sending text messages to her sister's young son asking for money.

The charity said it is monitoring reports about logbook and guarantor lenders and will share its findings with regulators.

Citizens Advice chief executive Gillian Guy said: "The drop in the number of problems reported to us about payday loans is good news for consumers and demonstrates the impact a strong stance against irresponsible lending can have on people's lives."

Payday Loan Fees and Interest Capped
Payday Loan Fees and Interest Capped

Borrowing on AOL Money:

Payday loans force couple to live in their car

Compare 0% credit cards

Are you being blocked from borrowing by hidden records?