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Payday lenders 'detrimental' to most vulnerable consumers

Payday lending causes enormous consumer detriment and harm to people who are among the most vulnerable, a new report concludes.

11 May 2014
Loan Money

Payday lending: fixing a broken market, commissioned by the Association of Chartered Certified Accountants, suggests that “existing online payday-lending business models are reliant on repeat borrowing for their profitability” and “many payday loans serve only to increase the likelihood of future indebtedness”.

For instance, an Office of Fair Trading investigation published last year found evidence of a borrower who had been so poorly served by the payday-loan sector that they had rolled the same loan over 36 times.

But unscrupulous lenders who encourage repeat borrowing through rollovers don’t just hit the hard up, they also hit the economy, according to the report. “Not only would many payday borrowers have been better off without these loans but our economy would also have been boosted had that money been left in their pockets,” it says.

There’s also a risk that multiple loans allow lenders to finance each other’s activities. In short, more payday loans simply lead to more payday loans. Meanwhile existing regulation may make “bad” behaviours more profitable than “good” ones, leading to the crowding out of responsible lenders.

The promised new cap on the total cost of short-term credit could help improve the industry but “affordability should be of primary importance in setting the new rate cap”, the report warns.

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