Online payday loans could end up being the next mis-selling scandal, a former lawyer at the Financial Ombudsman Service has warned.
James Ward, associate at Thomson Snell & Passmore, said it is time for proper regulation of the sector. "If it transpires that lenders haven't acted ethically or provided adequate information to borrowers, a deluge of complaints may follow," he warned. "The legislation that regulates this area is simply not adequate."
He believes the problem with online lenders is their promise to lend funds instantly. "There is no time to assess whether they should be lending to the borrower at all, and this is virtually impossible without a face-to-face transaction," he said.
"A vulnerable consumer, desperate for some quick cash, will simply tick whatever boxes they need to get it without reading the small print. It is highly doubtful that they will understand the terms of the loan."
Payday loans are aimed at people who need short-term cash for a few days. As such they are expensive, with APRs of up to 5,000 per cent. Payday loan firms point out that their deals could be cheaper than going into the red at a bank, once you've taken account of penalty charges and daily interest. But traditional lenders tend to investigate whether a borrower is creditworthy and can meet repayments.
"Online payday loans should be banned. They are too easy to get, too quickly," Mr Ward said. "Or there should be a minimum time, at least seven days, between the application being accepted and the funds being provided. Restricting the number of rollovers allowed would also limit the extent to which loans could escalate."Reuse content