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Loans & Credit

Simon Read: Payday lenders allowing multiple loans is leading to debt disaster

The number of people getting into financial trouble by taking out multiple payday loans has soared in the past three years, new figures published by a debt charity revealed this week.

Since 2009 four times as many people have turned to the Consumer Credit Counselling Service for help because they have 10 or more payday loans. Yes, that did say 10 or more.

Meanwhile the charity says it's experienced a three-fold increase in distraught debtors asking for help with the five or more payday loans they've taken out.

The fact that a person has one payday loan would send off alarm bells in me. As I've often written, there is a place for the deals. But I believe they are only suitable for those who know exactly how much the loans will cost them and also know that they can — and will — be able to afford to pay them back quickly.

Short-term credit becomes a danger when it's used by people who don't understand the costs and, especially, those who don't know how they are going to pay them back.

So if someone takes out more than one loan at a time, there's no doubt in my mind that they're heading for financial woe.

There are further statistics from the charity that make for interesting reading. It reports that more people than ever are getting into trouble after taking out high-cost credit — which costs up to 4,000 per cent APR from the likes of Wonga and other payday lenders. And the average amount struggling people owe is also climbing — it's up from £1,187 in 2009 to £1,458 this year.

The charity said the number of people seeking help with payday loan debts soared from 6,491 in 2009 to 17,414 in 2011. And with almost three months to go in 2012, 16,467 desperate debtors have this year sought help.

The payday loan industry has been thrust back in the spotlight this month partly because leading firm Wonga has splashed out millions on sponsoring Newcastle United.

The move has prompted plenty of debate about the expensive lenders and their place. Most Newcastle fans are simply happy that their club has been promised an inflow of much-needed cash.

Most debt experts worry that Wonga will use its new influence in the North-East to encourage more people to take out one of its expensive loans.

And that's one of the fundamental things that's wrong about the whole payday loan industry. The firms that offer them appear to use whatever methods they can to flog them.

In recent months we've seen ads targeting students and the un- employed with the message — and I'm paraphrasing only slightly — "take a loan and have a party!".

We've also seen ads on apps aimed at children as well as misleading claims about the cost of credit.

This type of advertising needs to be much more tightly controlled, I believe, to stop millions ending up in debt misery.

The problem at the moment is that the loans are sold to absolutely anyone. I did meet with representatives of some of the leading payday loan firms this week, who claimed that responsible payday lenders turn down nine out of 10 applicants.

But the problem is that there are countless irresponsible lenders out there. I was approached by one this week on Twitter (@simonnread) who asked for publicity.

I'm not going to name the lender (because they would see that as good publicity) but I will set out some of their deplorable practices.

For starters their website contained no mention of the cost of loans. This is a legal requirement which means, straight away, that the new lender is flouting the law.

Next, the website was full of good reasons to take out a loan, but no warnings about having to repay the debt. Third, and perhaps most irresponsibly, it stated that it doesn't matter if you've been turned down by other lenders, the website would still find you a loan.

Like the hundreds of other rogue payday lenders springing up, it flouts the law and flogs expensive loans to people who can't afford them, putting them in serious danger of ending in a disastrous debt cycle.

The fact that most payday lenders have no credit scoring and don't share data about their loans means it's easy for someone to borrow several times over.

I hope that the current Office of Fair Trading probe into the sector examines these issues. Rogue payday lenders must be closed down quickly while those that aim for respectability most be more tightly controlled.