Payday loans and unauthorised overdrafts 'unhealthiest forms of credit'

Payday loans have been identified as the "unhealthiest" form of credit in a new report, with unauthorised overdrafts coming second.

More than 500 borrowers were asked about the impact different forms of credit had on them to compile the findings.

The report from health education charity the Royal Society for Public Health (RSPH) ranked payday loans as having the most negative impact on mental well-being, followed by unauthorised overdrafts, doorstep loans and weekly payment stores.

The research was welcomed by Hollywood actor Michael Sheen, founder of new scheme the End High Cost Credit Alliance.

The Twilight and Frost/Nixon actor said: "We share a moral responsibility to help protect vulnerable customers from the harm high-cost credit causes.

"The evidence on the impact on our health and well-being is now overwhelming. We have the evidence. Now we need action."

For each form of credit that someone said they had used in the past two years, those surveyed were asked how trying to keep up with repayments made them feel - such as whether they felt angry, depressed, anxious, ashamed, or guilty.

Nearly half (49%) of credit users who drink alcohol said they drink more as a result of their debt, rising to three in five (62%) among payday loan users.

The report found catalogue credit came out with better scores than some more mainstream forms of credit.

It said catalogue credit can become part of people's weekly budgets and the products involved - clothes and consumer goods - may make people feel good, even if only for a short time.

Credit unions came out very positively in the report.

RSPH is calling for stronger action to end the marketing of high-cost credit to vulnerable people.

Lenders should train all employees in carrying out mental health assessments before providing credit, the report said. It is also urging better signposting to debt and mental health services.

Shirley Cramer, RSPH chief executive and chair of the End High Cost Credit Alliance, said: "It is high time more financial products are developed and targeted with sensitivity to the health and well-being of the public, and not just to exploit their financial situation."

The Financial Conduct Authority (FCA) has been probing the high-cost credit sector and in recent years a cap has been put on the overall cost of a payday loan.

Christopher Woolard, FCA director of strategy and competition, said: "The FCA took over regulation of consumer credit four years ago.

"In this time we have introduced new rules for the payday sector and credit card market.  In addition we secured over £900 million in redress for customers where standards have fallen short.

"As we said in January, we continue to have concerns with the overdraft, rent-to-own products, home collected credit and catalogue credit market.

"We are looking at these areas and will be publishing our plans in May of this year."

Trade body UK Finance, which represents banks and other financial firms, pointed out that an unauthorised overdraft is not something which is marketed to people and tends to happen when someone has miscalculated their finances.

Banks send text alerts to help people avoid slipping into the red.

A UK Finance spokeswoman said: "UK Finance members are committed to lending responsibly and always undertake a thorough risk assessment of a customer's finances whenever they apply for credit.

"The industry set up the vulnerability task force in 2015 alongside consumer and stakeholder groups to support customers in vulnerable circumstances and to raise lending standards across the industry.

"If a customer is struggling with repayments, we always advise they speak to their lender straight away."

Gareth Shaw, a money expert at Which? said: "Banks have made over a billion pounds a year through unfair unauthorised overdraft fees, which we have previously found can cost considerably more than payday loan charges.

"We want the regulator to restrict these fees, bringing them quickly into line with arranged overdraft charges. The FCA must take swift action on the unauthorised overdraft fees that banks charge their customers - many of whom can afford it least."

The report's ranking of credit products, from having the most to the least negative impact on mental well-being, are:

1. Payday loans
2. Unauthorised overdrafts
3. Doorstep loans
4. Weekly payment stores
5. Bank loans
6. Authorised overdrafts
7. Credit cards
8. Catalogue credit
9. Store cards
10. Credit unions
(Forms of credit where there were fewer than 40 survey responses were excluded from the research)

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