Payday loans concern for jobless
- 24 July 2012
- From the section Business
An increasing number of unemployed people are struggling with payday loans, a charity has warned.
The Consumer Credit Counselling Service (CCCS) called on the industry to offer more protection to the jobless in a new code of conduct due later this week.
There are no specific rules to stop a lender offering a short-term, high-interest loan to the unemployed.
However, affordability checks should be carried out to ensure that a borrower has the ability to repay.
Payday loans have become increasingly more common in the UK, but concerns have been raised regularly by consumer groups worried that people are getting into a spiral of debt.
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.
However, the CCCS debt charity said that one in 20 of its clients who were unemployed had pre-existing payday loans that they were struggling to repay.
There had been a four-fold increase from 283 clients in 2009 to 1,243 last year, despite no sign of a rise in the total number of unemployed people coming to the service for help. The average debt among those affected was £918.
"Unemployment is the biggest single driver of debt problems in the UK, and people who have lost their job after taking out extremely expensive payday loans are finding it particularly difficult to cope," said Delroy Corinaldi, of the CCCS.
"Payday lenders must recognise this growing problem. Crucially, payday lenders must also commit to work with debt charities like CCCS to set up affordable repayment plans when any borrower finds they are in difficulties.
"These figures should also serve as a warning to anyone considering taking out a payday loan. Consumers should consider how they are going to afford to repay this high cost credit in the event of a shock to their income from redundancy or another unexpected event."
The Office of Fair Trading, which regulates the industry, said that lenders could offer payday loans to the unemployed.
However, affordability checks should be carried out which include questions about regular income and employment status.
Richard Griffiths, of the Consumer Finance Association - the industry trade body, said that lenders did carry out checks but "cannot see the future".
"If a customer finds their situation changes and they are struggling to meet their commitments they should always seek help," he said.
"A debt management charity like the CCCS, National Debtline or Money Advice Service can certainly help enormously but they should also talk to their lender before they get into difficulty as responsible lenders will always seek to help the customer."
A new code of conduct will be unveiled by the industry later this week, after talks with the government.
It is likely to include commitments aimed at preventing a build-up of unmanageable debts for consumers.
Lenders have already said they will freeze charges and interest for borrowers in difficulty, no later than 60 days after they stop making payments.
Borrowers would also have the charges frozen as soon as they managed to agree an acceptable repayment plan.