Q&A: Payday loans

By June 11, 2013Insolvency

Payday lenders have faced criticism from all angles in recent months.

Insolvency experts predict that more people who are short of money are going to turn to payday lenders – who can be found on the High Street and the internet – for a short-term loan.

Some debt charities and consumer groups have warned that such lenders can lure the unwary into taking on debt that balloons out of control.

An official study in 2010 said they provided a legitimate, useful, service that helped to cover a gap in the market.

But in early 2013, the Office of Fair Trading said that there was widespread irresponsible lending in the industry.

How do payday loans work?

Typically someone will borrow a few hundred pounds from a payday loan firm for a short time, to tide them over until they receive their next wage or salary cheque.

The borrower will usually offer a post-dated cheque to the lender to cover the eventual repayment of the money borrowed, plus interest.

The cash is often emergency borrowing to pay an urgent unexpected bill, or rent or utility bills.

How many people use them?

There are no official figures on how many people use this sort of borrowing.

But Consumer Focus estimated last year that 1.2 million people took out 4.1 million loans in 2009.

In 2008, £900m was was taken out in the form of payday loans, according to the Office of Fair Trading in a formal review of all “high-cost” credit businesses in 2010.

But it said the value of the loans was growing rapidly.

As a result of its most recent inquiries, which led to an interim report in November 2012, the OFT thinks that as much as £1.8bn a year may now be being lent by payday lenders.

The Public Accounts Committee (PAC) said that about two million people in the UK used payday loans.

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Maidment Judd

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