The real cost of pay day loans

pound coin

Law Centre staff have hit out at payday loan companies, with debt spiralling out of control for many families.

  • Elizabeth Davidson in a two-part article on debt looks at pay day loan companies in this article and, next week, the problems associated with the telephone gateway

More than six months after legal aid was withdrawn from debt matters, the impact is hard to gauge – the lack of funds means nobody knows the extent of misery which could have been ameliorated by legal intervention.

However, Law Centre staff report that debt problems have increased in the last two years.

Laura Robinson, debt caseworker at Cumbria Law Centre, Carlisle, has heard of doorstep lenders targeting families just before Christmas to try to get them to take out a loan for their children’s presents.

She says debt has worsened in the last two years, with a marked increase in the number of people in work turning to payday lenders to pay utility bills.

Robinson, who would like to see payday lenders banned, thinks the solution is to promote credit unions which “charge interest as low as 0.1%, meaning a borrower may pay back £525 on a £500 loan after 12 months”. He adds: “The drawback is that loans are only available to savers, although credit unions will accept savings of as little as £1 per month.”

On a more fundamental level, more education in schools about money and finance might help, according to Robinson, who says: “Most people don’t look at interest rates, they look at weekly payments. A lot of people don’t understand how APR works.”

Payday loan companies often charge interest above 2000% APR.

People frequently take out a second loan to pay off the first, ending in an uncontrollable spiral of repayment, says Robinson, who has seen people paying back loans for 25 years. They are then put under pressure by the lender to repay at unaffordable rates, and come to the law centre for advice when they can’t pay their rent. Unfortunately, Robinson has had to turn all debt matters away since April, when legal aid was removed.

Bruce Bebington, of Lambeth Law Centre, in south London, said particular problems with loan companies included lenders “rolling over loans so that the debtor is left unsure what to pay and when”, debtors being placed under “undue pressure” to repay overdue loans, lenders “ignoring approaches by money advisers in the free advice sector”, and lenders granting loans without checking the loan is affordable.

Lenders also use continuous payment authority (CPA) to get the loan repaid without explaining to the debtor how it will work, he said, and if the CPA fails on settlement day, they use tactics such as “representing it much later and often to empty the debtor’s bank account or put him or her in unauthorised bank overdraft until the debt is paid or many months have passed”.

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