April 21 2014 Latest news:

Ban eye-watering APRs and save the finances of a growing number of short-term borrowers. It is an understandable theory – but the case may not be as simple as at first sight.

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Loans factfile

• Last year, the average size of a payday loan was an estimated £294.

• About two-thirds of payday loan borrowers have a household income of less than £25,000.

• Payday loan users tend to be young and single. It is estimated that over half of borrowers are under the age of 35 and 60pc are not married or cohabiting

• Payday loans are short-term loans typically repaid on the customer’s next payday often with a post-dated cheque or authorisation to make an automatic withdrawal from the customer’s account.

• The danger for consumers comes when they take out a loan and cannot repay it the next month. If they defer payments or take out repeat loans, charges can quickly balloon. People can find themselves dependent on loans and facing a spiral of increasing debt. As an example, if a payday borrower takes a loan of £300 at a rate of £20 per £100 borrowed, then £360 would be due at the end of the loan

(typically a month). If the loan was rolled over for another month, then the borrower would pay a £60 fee, but still owe the principal amount of £300. If the customer rolls the loan over for six months, they would have paid £360 in fees, but still owe the original loan sum of £300. Therefore, if a £300 loan was rolled over for six months it would end up costing £660 in total. _ Last year, the average size of a payday loan was an estimated £294.

• About two-thirds of payday loan borrowers have a household income of less than £25,000.

• Payday loan users tend to be young and single. It is estimated that over half of borrowers are under the age of 35 and 60pc are not married or cohabiting.

• Payday loans are short-term loans typically repaid on the customer’s next payday often with a post-dated cheque or authorisation to make an automatic withdrawal from the customer’s account.

• The danger for consumers comes when they take out a loan and cannot repay it the next month. If they defer payments or take out repeat loans, charges can quickly balloon. People can find themselves dependent on loans and facing a spiral of increasing debt. As an example, if a payday borrower takes a loan of £300 at a rate of £20 per £100 borrowed, then £360 would be due at the end of the loan (typically a month). If the loan was rolled over for another month, then the borrower would pay a £60 fee, but still owe the principal amount of £300. If the customer rolls the loan over for six months, they would have paid £360 in fees, but still owe the original loan sum of £300. Therefore, if a £300 loan was rolled over for six months it would end up costing £660 in total.

Short-term legal payday loans with very high and often debt-fuelling APRs should be banned – or the rules tightened dramatically – according to lobbyists. With recently gathered evidence of one yearly loan rate as high as 11,982pc and around 2,500pc common place, bosses at the credit union, which has branches around the county, said an immediate ban was one way of addressing the problem.

But completely removing the ability to take such short-term loans could drive consumers into the arms of far more suspect loan sharks operating illegally, said experts at independent lobbyists Consumer Focus.

Instead of bringing in a catch-all ban, Consumer Focus advisers have said a range of rules need to be brought in to make payday loans work more effectively and to safeguard people taking them out. Alan Squirrell, president of the Long Stratton-based Norfolk Credit Union, said he was shocked by some of the high interest rates he had seen for unsecured loans.

“We have just seen the highest interest rate charged on a loan for someone who has come to us for help – 11,982pc APR,” said Mr Squirrell. “Rates of around 2,500pc are now common with people seeking our help and in the region of 200pc to 400pc is normal for thousands using doorstep lenders. All this is quite legal although many may think it is immoral and unjustifiable.

“It is always those least able to afford the high interest rates that get caught by them.”

Mr Squirrell said past governments had refused to act on the control of unsecured loan interest rates as advisers had warned that lack of loan supply may drive people to the even worse illegal lenders. However, he said, now was the time to act using alternatives tied in with David Cameron’s policy of a “Big Society”.

“In Norfolk and in many other parts of the country, credit unions are now growing to a suitable size and offering a full range of financial services that can meet the people’s requirements. They still need a little help while expanding and the government must look at this as a priority issue.

“A little well-directed investment at the sharp end, redirected from wasteful quangos of which there are still plenty, will save millions of pounds leaving the local economy.

“Cameron, Clegg, Hague, Pickles et al should come and speak to those on the ground who really know what is happening and what needs doing rather than remote academic or theory but poor on practicalities.

“Ban high interest rates now and support us to help fill the gap.”

Despite the fact that payday loans have quadrupled over the last four years, according to Consumer Focus, the same organisation has a slightly more in-depth message than the Norfolk Credit Union, saying a ban –which exists in some US states – would not work.

Banks needed to offer affordable short-term loans, they have argued, and stronger safeguards are required to protect consumers. Research estimates that payday loan borrowers are taking out an average of three and a half loans a year. Consumer Focus has urged a precautionary approach from industry and regulators to stop borrowers becoming dependent on this form of high-interest credit. Marie Burton, financial services specialist at Consumer Focus, said: “With the credit crunch, demand for short-term borrowing has significantly increased despite the eye watering interest rates charged by some payday lenders.

“Such expensive rates can leave consumers who defer payments, or take out repeat loans, caught in a debt trap. These products are controversial, but we don’t agree with calls for them to be banned.

“Outlawing payday loans could leave some borrowers vulnerable to illegal loan sharks. Instead we need sensible safeguards now to stop borrowers becoming dependent on this high-cost credit and prevent even more stringent controls being needed in the future.”

Reform of the UK market should include:

► The number of loans taken out or rolled over to be limited to five per household annually. Where consumers have ‘“rolled over” or taken out loans a maximum of five times in one year, this should be taken as an indicator of financial difficulty and lenders should be obliged to direct the borrower to independent debt or money advice.

► Companies specialising in short-term loans should be forced to carry out more stringent checks to ensure people can afford their repayments.

► Payday lenders should share information to avoid people borrowing from multiple lenders simultaneously and develop an industry code of practice.

► Banks to provide affordable alternatives for customers needing to take out short-term loans. Greater transparency of bank products and services, such as clearer fee structures and fair charges.

► Alternative affordable credit from social lenders such as credit unions to be further encouraged and promoted by both the financial services industry and the government.

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