OFT to investigate payday loan companies
The Office of Fair Trading (OFT) is to investigate Payday lenders over concern that they may be encouraging people to take out loans without checking that they can afford to repay them.
Payday lenders offer short-term loans at very high interest rates and while these can be affordable if they are paid back at the end of the term – usually a month – the debt soon spirals out of control if it is rolled over.
With incomes under increasing pressure, payday loans are attractive to people who are unable to borrow from traditional lenders and their popularity has soared over the past few years.
The OFT now plans to review 50 payday lenders and could withdraw credit licences from firms who are failing to work within lending regulations.
The regulator previously stated that lenders should not have interest charges restricted, and said that firms offering high-cost credit provided a useful service to those locked out of other sources of credit.
The latest review will focus on lenders’ selling practices, including whether loans are issued before the lender has checked that the borrower is able to meet repayments and if vulnerable groups such as students and the unemployed are being targeted.
The OFT will also look into the practice of rolling loans over and allowing charges escalate to unmanageable proportions.
It is hoped that the review will lead to an improvement in standards across the industry.
A recent report by PricewaterhouseCoopers (PwC) suggested that the use of payday loans could soon overtake credit cards, making them a mainstream source of borrowing.
In PwC’s ‘Precious Plastic 2012’ report, director Simon Westcott said: “Mainstream lenders need to be aware that what may have begun as a last resort could be an enduring relationship, as consumers are pleasantly surprised at the convenient and innovative service they receive from these smaller, more agile providers.
“As these providers become more conventional, we are likely to see them venture further into the mainstream market with their own credit card, longer term loan products or even current accounts.”
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