The cheery adverts would have you believe that everyone getting a payday loan is in an exceptionally good mood, relieved to have found an easy solution, and ready to pay it back. Research from Which? has revealed that the reality is very different - leaving almost half of all borrowers in a spiraling debt trap.
So what is going on?
UnaffordableThe researchers found that those who were turning to these loans in the first place were in a financial black hole - which could never be solved by a quick injection of cash. Over 60% of people who took out payday loans were using the money to pay for household bills or buying other essentials like food, nappies and petrol.
Many were clearly unable to afford to borrow, but were easily able to because eight out of 34 companies don't carry out any credit checks as part of their approval procedure, and nearly two-thirds surveyed were not asked about any aspect of their financial situation apart from their salary.
SpiralOf course, for many thousands of people, the end result of borrowing money they cannot afford is that they either pay the loan back and find themselves short at the end of the month again, or aren't able to pay it back at all, and so perpetuate a cycle of borrowing.
The debt trap is compounded with 57% being encouraged to take out further loans, and 45% rolling over their loans at least once. A third of people were bombarded with unsolicited calls, texts and emails before they had even signed an agreement.
ChargesTo add insult to injury, a quarter who had taken out loans said they had been hit with hidden charges such as high fees for reminder letters.
A Which? investigation of 34 payday loans companies' websites also found that people could face a £150 charge by one company, Quid24.com, if they repaid their loan 10 days late. Most of the companies failed to show clearly their charges or charged excessive amounts for defaulting.
Some payday loan company websites also failed to provide any terms and conditions and many of those that did had little or no information about a borrower's rights and obligations or references to free debt advice - 14 out of 34 lenders failed to inform consumers about the complaints procedure.
UnacceptableWhich? executive director Richard Lloyd said: "With 1.2 million people taking out a payday loan last year, it is unacceptable for this rapidly growing number of people to be inadequately protected from extortionate charges and dodgy marketing techniques. At its worst, this booming £2 billion industry can be seriously bad news for borrowers who are struggling to afford food or pay their bills. People are getting caught up in a debt trap, whacked with high penalty charges, or encouraged to roll over payments and take out more loans at inflated rates."
Sarah Brooks, Director of Financial Services at Consumer Focus, added: "This research throws up some extremely troubling findings and poses many uncomfortable questions about the growing payday loan sector. We have long held concerns about the behaviour of some payday lenders and whether consumers are losing out because this industry is not regulated strongly enough."
"Our research in 2010 showed problems with inadequate affordability checks and borrowers being offered multiple new loans or roll-overs on existing loans. Which?'s findings suggest that problems have worsened in this industry and that more borrowers are finding themselves caught in debt traps. Millions are turning to these loans in the current economic climate and it is usually those on lower incomes that suffer most."
GovernmentWhich? is calling on the OFT to properly enforce existing consumer credit and lending rules that already apply to payday loans firms. Brooks agrees and adds: "'This work is timely given the OFT's compliance review of payday lenders. There is clearly a continuing problem with payday loans and this should give further incentive, if any is needed, for the OFT to act quickly to protect consumers from spiralling debt."
But Lloyd wants this to go still further, saying: "The regulator should properly enforce the existing rules that apply to this industry, but they must go further and impose a cap on the amount that lenders can charge for defaulting. The Government should also now explore other ways to protect hard-pressed borrowers, including Australian-style measures to cap costs and promote affordable alternatives."