OFFICE OF FAIR TRADING TARGETS PAYDAY LOAN SHARKS

The OFT has told payday loan companies they will lose their licenses unless they stop handing out cash 'irresponsibly' Some 50 payday loan companies, amounting to 90% of the industry, have been given 12 weeks to tighten up their lending practices or face closure. The Office of Fair Trading has also promised to refer the payday lending market to the Competition Commission, after uncovering 'deep-rooted' problems in how lenders compete against one another. The Big Issue has long campaigned against these companies, who lend cash at exorbitant rates of interest to people who are ill-placed to repay the debt. In December, financial expert Martin Lewis, founder of the website moneysavingexpert.com, told our readers they would be better off 'cancelling Christmas' than taking out a pay day loan. Clive Maxwell, OFT Chief Executive, said: 'We have found fundamental problems with the way the payday market works and widespread breaches of the law and regulations, causing misery and hardship for many borrowers. Payday lenders are earning up to half their revenue not from one-off loans, but from rolled over or re-financed deals where unexpected costs can rapidly mount up. 'We are proposing to refer this market to the Competition Commission, which has wider powers to get to the heart of the problems in this market and to identify and impose lasting solutions that protect consumers.’ 'Irresponsible lending is not confined to a few rogue payday lenders - it is a problem across the sector. If we do not see rapid, significant improvements by the 50 lenders we inspected they risk their licences being removed. Payday lending is a top enforcement priority for the OFT.' The OFT have identified the following problems with the payday loans sector: - The targeting of customers with 'limited alternative sources of credit and are frequently in a vulnerable financial position'. In other words, people who have no cash and won't be able to pay back the huge interest. - Huge interest rates that make the problem of 'irresponsible lending particularly acute'. - Using advertising materials that emphasize how easy it is to get a loan rather than the actual cost of taking one out. - Relying heavily on the refinancing of loans, meaning that people borrow more money to pay the cash they already owe. Although the payments are described as one-off short term loans, which cost an average of £25 per £100 for 30 days, up to half of the companies' revenue comes from longer loans which are refinanced. Credit campaigners have praised the OFT’s actions. Michelle Highman, chief executive of Credit Action said: 'The OFT provides detailed guidance on irresponsible lending and debt collection practices – if firms don’t comply with the regulator, they should expect to face the consequences. The industry and its trade associations need to act immediately to address the issues raised.” Financial expert Martin Lewis, founder of the website moneysavingexpert.com, had this warning for anyone thinking of taking out a payday loan: 'You would be better cancelling Christmas than taking out a payday loan. It’s time for the UK to go cold turkey on bad debt. 'Other countries like the US have hardcore regulations. We don’t. It’s easy for irresponsible companies to come here and pump out easy credit. You have debt pimps who have shops out on the high street, trying to entice people to borrow. It’s impulse-driven, which is the genius of how they operate.' 'It’s a wonderful business founded on excellent technology and limited morality. Lenders almost don’t want you to pay them back. They rollover debt so you borrow to pay off loans, sometimes going to another company to pay off the first lender. They don’t put marks on your credit rating, meaning responsible lending is more or less impossible. More and more people borrow £100 and end up owing thousands. I used to say store cards were the devil’s debt, at 30 per cent APR. This is way beyond that.'