Payday loan borrowers are being ripped-off with some paying £30 more than others for borrowing just £100, the Competition and Markets Authority warned this morning.
After a 12-month investigation into the high-cost credit sector the CMA concluded that borrowers are being charged £45m a year too much, with most being charged a fiver or tenner too much each time they borrow.
The Authoirty is calling for an independent price comparison site so borrowers can see at-a-glance which loans charge rip-off interest.
It is also demanding that lenders tell people upfront how much they will be charged if they don't repay on time and that lead generators comes clean about their activities so that borrowers know which firm will actually be lending to them.
The problem stems from a lack of competition among payday lenders, the CMA said.
The conclusion forms part of the Authority's first report on the payday lending market since being the Office of Fair Trading refered it last June. Its investigation involved analysing some 15m payday loans taken out between 2012 and 2013.
Simon Polito, chairman of the CMA's Payday Lending investigation group, said people taking out a payday loan because money is tight, shouldn’t have to pay more than is necessary.
"While the average income of payday lending customers is similar to that of the overall population, their access to other credit options is often limited when they are taking out a payday loan and in some cases those borrowers paying the extra costs are the ones who can afford it the least," he said.
"This can particularly apply to late payment fees, which can be difficult to predict and which many customers don’t anticipate."
The UK payday lending industry has grown dramatically since the recession hit in around 2008 and now generates revenues of around £1.1billion.
The CMA said it will now examine ways to increase price competition, including setting up an independent price comparison website, enforcing clearer upfront disclosure of borrowing costs if a loan is not paid back in full and on time, as well as requiring greater transparency about the role played by lead generators.
"There is a substantial gap between the cheapest and most expensive loans, so borrowers could benefit if we can help them compare prices more effectively, which in turn would stimulate greater price competition and lower costs," said Mr Polito.
Tough new rules introduced in April have forced almost half of payday lenders to pull out of the business, the Financial Conduct Authority revealed last month.
Its figures showed that around 70 firms have not applied for permission to continue offering high-cost credit to customers since the FCA took over responsibility for the sector on 1 April.
On top of that 30 more have had their credit licenses revoked since the beginning of last year as regulators attempted to rein in the activities of rogue lenders.
Today's report and subsequent action by the CMA could see further lenders pushed out of the market if they are forced to shrink their profits.
"We now need tough action to put this right," said Richard Lloyd of Which?Reuse content