Payday loans can lead to spiral of debt

March 9, 2013 - PRLog -- Electricity, water and gas are only the tip of the iceberg when it comes to the average person’s monthly expenditure.

When the cost of food, running a car and paying for mobile phones and broadband are added to the heap, panic begins to set in when payday is still a speck on the horizon.

Payday loan companies, which offer a fix-it loan – available in as quick as 10 minutes – provide only temporary relief, which often lasts as long as the money, and can then give way to anxiety over the spiralling interest on the original sum borrowed.

Now, the Office of Fair Trading has promised a crackdown on irresponsible lending and has given the country’s payday companies 12 weeks to clean up their act and cut costs or face closure.

The decision to overhaul the £2 billion sector followed an OFT investigation into the operations of 50 of Britain’s payday money lenders, as well as the gathering of information on all 240.

Andy King, specialist money adviser at the Citizens Advice Bureau, Cambridge, said that the advertised 4,000% APR on some quick-fix loans is only the start of the problem that comes with an outstanding bill.

Mr King said: "The problems come with the extra charges that get put on an account when the debt cannot be paid.

"When a client can’t afford to repay their money at the end of the month, they have to take out another loan.

"If the loan was just for a festival ticket or something, a couple of hundred pounds to tide you over until payday, then we would say fair enough but we see people borrowing money for an emergency and then borrowing money to pay back what they have already borrowed."

One of the biggest problems borrowers face is the prospect of having to roll over their loan when they have no money to pay off their initial sum and the OFT report revealed that almost half of the profit for the loan companies comes from these rolled over, refinanced and drawn out loans.

Mr King said: "I have seen clients who have rolled over a loan 18 or 19 times. Debts just continue to go up."

The specialist money adviser also agreed with the OFT point that proper credit checks should be carried out on all people applying for a loan, as opposed to being dedicated to providing speedy cash.

Earlier this year, the News reported that arsonist Thomas Richardson, who was jailed for five years and four months after torching Chilford Hall with Mark Hall, who received four years, borrowed money from lending site Wonga to fuel the alcohol binge which led to the blaze.

Cambridge Crown court was told that alcoholic Richardson only had £15 in his bank account before applying for a loan through Wonga, which he said was for energy bills.

He received £100 in 10 minutes into his bank account and used the money for drink before starting the fire that caused millions of pounds of damage.

Mr King said: "We have had some difficulties with people being lent money without due checks on their credit. What we see a lot of the time is clients who can’t get a roll over, and have got payday loans with more than one company.

"We are trying to encourage people to choose wisely when they do need to borrow.

"We are still here to help people when problems do occur and there’s always a way out of the situation with debt."

The 12-week time limit for the loan companies may seem short and sour, but Cambridge’s MP remains confident that changes will happen for the better.

Julian Huppert MP said: "I think we will see significant changes within 12 weeks. They are big businesses and they don’t want to lose their licence.

"I think they will take steps to make sure that they don’t drop people in debt and what we don’t want is to drive people into the hands of real loan sharks."

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