The Office of Fair Trading has supported The Independent’s campaign to crack down on unscrupulous payday lenders who target vulnerable people at Christmas.
Meanwhile a new survey published revealed that the situation is reaching crisis point with more than 5m people expected to turn to expensive short-term credit in the next few months.
The survey by insolvency firm R3 reports that one in 10 people who use payday loans is forced to choose to pay back the loans and extortionate interest rather than use their cash to buy food.
Even more frightening is the fact that one in three payday loans is taken out to pay for other payday loans.
David Fisher, Director of Credit, at the OFT, said: “We expect payday firms to be responsible, making sure they only lend to those who are able to repay the debt. We would be particularly concerned if payday lenders were deliberately targeting vulnerable consumers.”
Co-operative Labour MP Stella Creasey, who has campaigned against what she calls legal loan sharks, said: “The public know these loans are toxic, but what choice do they have when they’re trying to keep a roof above their heads or pay to get to work?
“I warned ministers in 2010 that they were facing a debt crisis if they didn’t stop these companies exploiting our lax credit regulation. In two years they have done nothing and millions more are now facing a debt-laden Christmas and New Year.”
Our evidence published today revealed that many aggressive lenders are planning to cash-in on struggling people this Christmas by encouraging them to take out expensive short-term credit.
In many websites that have sprung up in recent weeks hoping to make an easy profit, typical messages suggest people "join in the holiday festivities without a second thought to the cash in your bank account."
But outrageous charges on the short-term loans soar to 4,248.9 per cent APR.
Neera Sharma, assistant director of policy at children’s charity Barnardo’s said: “The families we work with struggle more at Christmas. They’re on very tight incomes and are forced to get by on just £12 a day. If they’re encouraged to take out a payday loan, they very quickly end up on a cycle of debt.”
Una Farrell of the Step Change Debt Charity says there has been a steep rise in payday loans problems among those seeking its help.
“While payday loans are an expensive form of credit to begin with, that is only part of the problem,” she said. “Expensive roll-over charges mean that they can quickly spiral into unmanageable debt if a borrower cannot repay what they owe at the end of the month.”
Another growing problem is the fact that borrowers are often allowed to take out multiple payday loans. “The issue of multiple lending needs to be addressed to prevent people falling into these destructive debt cycles,” said Ms Farrell.
The OFT is in a middle of an investigation into some of the dodgier practices used by the payday lending and high-cost credit industry. In particular it is examining accusations of irresponsible lending and pushy marketing and is expected to announce tougher new rules next Spring.
Russell Hamblin-Boone, chief executive of the Consumer Finance Association, which represents some of the leading short-term lenders, said: “We recently issued advice to consumer considering taking out a payday loan to fund their festivities. In essence it said, if you can’t afford to borrow, don’t take out a loan. Sound advice indeed.”
Ami Jarman racked up debts of £14,000 in three years after falling into a desperate debt cycle with payday loans.
The 22-year-old healthcare worker from Hertfordshire originally borrowed just £100 to help get a new tyre for her car in 2009 when she was 19.
But it was so easy to borrow the cash that she quickly came to rely on it, but borrowed more each month to cover the interest.
“The problem is that it’s so easy to get the money, you just fill in a few forms and it’s in your account the same day,” she says.
“Since 2009, I have borrowed a little shy of £8,000 and I have paid back just under £14,000,” she admits. I started thinking about what I could have done with that money and soon wished I hadn’t.”
Eventually she admitted her problem to her family who have helped her and she’s written a blog – at amiiiiiiiiii.wordpress.com - to help other people avoid getting into the same problems she had.