Payday loans creating Zombie debtors
High levels of interest on payday loans are helping to create ‘Zombie’ debtors – people who can only afford to pay the interest on their debts each month and not the debts themselves.
Based on a study of 2,000 adults, insolvency trade body R3 suggests that around 45 per cent of the population struggle to make their income last until payday and around 3.5 million adults are thinking about taking out a payday loan over the next six months.
Payday loans are short-term unsecured loans, averaging around £300 in value.
According to R3, sixty per cent those who take out a payday loan regret the decision and nearly half believe the loan made their financial situation worse.
The survey also found that young people were most likely to be attracted by a payday loan, with people between the ages of 16 and 24 using this form of credit.
R3 also announced its latest Personal Debt Snapshot, which revealed an increase in the number of people without savings from 19 per cent last quarter to 27 per cent this quarter.
Consumer charity Citizens Advice recently warned of a four-fold increase in the number of people running into debt after taking out a payday loan, between May and July this year, compared with the same period in 2009.
The charity is calling on the government to introduce tighter regulations to protect consumers from payday loan companies who may charge interest rates of more than 4,000 per cent.
While these loans are reasonable if they are paid off as soon as the payment is due, debts quickly escalate if the loan is rolled over.
There are also often associated fees which can sometimes exceed the loan amount.
However Consumer Minister Ed Davey has expressed concern that tighter regulation could lead to people having to turn to illegal loan sharks.