Almost 50% of Payday loan users are either using the ëroll overí facility with their existing provider or taking on further debt within their 30 day loan period, a study by the Competition Commission has revealed.
In a comprehensive analysis of the industry, involving detailed interviews with over 15 million customers, the Competition Commission also found that over 35% of users pay their debts back late, whilst the majority begin to utilise payday loans on a frequent basis after receiving their first one.
The task of investigating the payday loan industry was given to the Competition Commission last year by the Office of Fair Trading, who had become concerned by the high level of users passing into default when utilising a provider in the sector.
And the study has emphatically concluded that the industry has been guilty of irresponsible lending and regulation breakage in the past few years, which has caused ìmisery and hardship for many borrowersî.
Payday loans are short term, high interest forms of finance that borrowers can acquire on a month-to month basis. Credit ratings and past financial history are typically not taken into account, and it is easy for anyone in employment to acquire one within hours if they apply online. The loans are intended to be used as forms of short time financial cover that are paid back when a user gets their next payday, but have been frequently used to cover essential payments in recent times.
Moreover, the hidden costs attached to the loans have come under heavy fire in recent times, with excessive default fees and supremely expensive ëroll overí charges propelling those into debt even further into the red when they first to make a payment on time.
ëRolling overí consists of the borrower paying the interest charge only at the end of the month, then rolling over the full loan amount plus interest to the next month to pay in full. However, these interest charges can often be vastly high, and can lead to people being trapped in a spiral of debt as they are unable to find the money to pay the full amount at the end of the month.
According to the Competition Commissionís data, just under 50% of payday loan users ërolled overí or took out a further loan from their provider, whilst 60% applied for another payday loan within 12 months. Moreover, the most likely payday loan users are males who are early in their career and are paying for their rent and bills. The Competition Commission has warned that their findings suggest that many users seek at least 3 to 4 more payday loans in the following two years from when they acquired their first one, implying that Britainís short time finance problem is nothing short of endemic.
“Taking into account borrowing from multiple lenders, repeat use of payday loans is likely to be even more widespread,” it said.
“Preliminary results from our analysis of credit reference agency data suggest that a large proportion of payday loan customers take out more than five loans in the space of a year.”
It is the excessive late charges and obscenely high interest rates that payday loan companies charge that has caused them to come under such great scrutiny in recent times, with the common perception being that they are exploiting the financially vulnerable at a time where they are likely to be struggling the most.
Rising costs of daily essentials such as energy, food and transport at a rate faster than inflation at the same time as growth in actual wages has remained stagnant has caused many finance commentators to identify that Britain is in a ëcost of living crisisí, with the wages of low-income workers being squeezed further and further as prices continue to rise.
The reality is that payday loan firms have profiteered from this situation, with just under 50% of those interviewed in the study identifying that they utilised short term finance in order to pay for living essentials such as their energy bills, food and housing.
And the urgency in which these sorts of people require the funding mean that they acquire loans with huge interest payments that eventually catch up with them later on down the line.
The Competition Commission found that the average payday loan value aw around £260, for a loan term of 22 days, which equates to a monumental £64 interest.
For someone with a stable income, this £64 interest plus how much they borrowed would be fine, but those utilising payday loans often do not have enough to pay back the actual loan itself, let alone the interest charge.
Moreover, the study found that 35% of customers did not pay their loans back on time, meaning these people would have to face default and late charges, added interest fees and monumentally higher repayment sum that those who paid on time
It is payday loans capacity to make this happen that has spurred multiple debt charities to argue that they lead to peopleís personal finance situations spiralling out of control, due to excessive application of late fees and the ëroll over facilityí they offer to all late payers.
The issue of ërolling overí is set to be addressed the Financial Conduct Authority, who are scheduled to begin regulating the industry from April this year. The FCA have already identified that they will implement a cap on the number of ërolloversí a borrower can have to two, as well as outlining their intention to implement a number of different reforms in order to make the industry safer for borrowers.
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