Payday lenders’ default fees could break the law

Many payday lenders could be breaking the law by charging excessive default fees to borrowers who miss repayments, according to Which?

An investigation by the consumer group revealed that 10 of 17 leading payday lenders have default fees of £20 or more, and four charged £25 and above, with Wonga topping the table at £30.

The consumer group’s legal opinion is that excessive default fees are unlawful under the Unfair Terms in Consumer Contracts Regulations 1999, which state it is unfair for lenders to charge a disproportionately high fee if borrowers default on a loan. The organisation has written to the worst offenders to challenge the level of their default fees, which it says should be no higher than the administrative costs associated with defaulting.

Wonga, the most profitable payday lender, said in response: “We charge a one-off default fee of £30 on late repayments that reflects the additional costs we incur in collecting these loans. This charge has been independently assessed as reflecting these expenses.”

The company added: “We are completely transparent about our default fee and it is clear to customers when they apply for a loan, and at least three further times before their repayment date.”

But, as Which? pointed out, high charges are one of the biggest factors that tip borrowers into a disastrous spiral of debt. Its research found that more than 50 per cent of payday loan users had incurred charges for missed or bounced credit repayments over 12 months, compared with just 16 per cent for all credit users.

One in five payday users said they had been hit with “unexpected charges”.

Richard Lloyd, executive director at Which? said: “We believe payday lenders are exploiting borrowers with excessive fees, which can push them even further into debt. If they cannot justify why these charges are so high and refuse to cut them, we would look to take further steps to protect vulnerable consumers. The regulator must also take action to ensure all fees are fair, proportionate and only reflect lenders’ costs.”

Some payday lenders impose lower default charges of £12. In 2006, the Office of Fair Trading found that penalty charges for credit cards should be no more than £12, unless there are exceptional factors.

Russell Hamblin-Boone, chief executive of the Consumer Finance Association, which represents many of the major payday lenders, said: “The industry is subject to a market investigation by the Competition Commission and this is the appropriate body to make judgements on fees. It is for the regulator to rule whether lenders are compliant with the current trading regulations and have made their charges clear to customers.”