Out of the wreckage of payday loans, a new breed of loan shark is emerging – and it is preying on the most cash-strapped and vulnerable.
A Mail on Sunday investigation today reveals that many short-term lenders are demanding that borrowers pay back loans with crippling interest charges.
Last week, we sought to find out how much a £1,000 loan would cost a borrower from 12 lenders promoting their wares on the internet.
Preying on the vulnerable: Out of the wreckage of payday loans, a new breed of loan shark is emerging
The information was hard to find, but once uncovered the results were shocking. They reveal that borrowers are being asked to repay anything between £1,237 and £2,000 – the maximum permitted under current regulations – for a short-term loan, typically of six months.
The results of our investigation have shocked some debt experts, who went on to say that such easily obtainable loans are fuelling a debt crisis among the young. They believe regulation of these loans is too lax and that the current system, overseen by the Financial Conduct Authority, is ‘not working’.
Borrowers, often young families, are being lured in by slick adverts and welcoming websites that feature cartoons and promise quick-fix solutions. But the reality is that rather than easing money worries, they are forcing many customers into even greater hardship.
Once these new loan sharks have sunk their teeth into a borrower’s bank account they will not let go until they have taken their pound of flesh – and more besides. After interest and charges, the total amount repaid can be double the sum borrowed. Failure to keep up with the payments can end with a visit from debt collectors.
The Financial Ombudsman Service recently revealed that complaints about these new lenders had risen 130 per cent in one year, with many acting in ‘unacceptable’ ways. It said some operators were lending cash to already vulnerable, debt-ridden people, making their situation worse.
Others were not providing clear information on charges. Some borrowers, it said, were saddled with as many as ten separate loans.
The Ombudsman told The Mail on Sunday: ‘Often money is lent to people when they have little means of paying it back. They then become trapped in a debt cycle. Lenders may turn to debt collectors if they do not get the money, turning an already desperate situation into a real personal crisis.
‘From the number of complaints we have received it seems the system is not working.’
The Financial Conduct Authority hoped it had killed off so-called payday lending firms four years ago when it introduced a strict new regulatory regime. This was in response to the likes of Wonga raking in millions of pounds in profit a year by lending at sky high interest rates. Most important of all, it said no lender would be allowed to demand more than 100 per cent of the amount borrowed in fees and interest on high cost, short-term loans, lasting up to a year.
As a result, it now means a loan of £1,000 should never cost more than £2,000. But the doubling is taking place over five or six months – generating big profits for lenders.
Our investigation has also found that providers are making it hard for borrowers to work out exactly what they will pay unless they make a formal loan application.
For example, Lending Stream would not say how much it actually cost to borrow £1,000 unless an online form was filled in providing bank details.
The Mail on Sunday phoned Lending Stream, only to be told that it couldn’t give any more than ‘an approximate amount’.
In one call that figure was given as £317.14 a month for six months, but when the newspaper rang the next day it was quoted as £333 a month – a difference in total repayments of more than £95. The call centre staff were unable to quote the fixed rate of interest.
While companies such as 118 118 Money have multi-million pound budgets to spend on telling you how simple it is to get a loan, it is less forthcoming when it comes to telling you how much it will cost.
For example, borrowing £1,000 might cost between £98 and £119 a month for a year – that is £1,176 or £1,428. It will not tell you exactly how much you must pay until – again – bank details are provided.
The idea is that once you have provided such details you are just a click away from getting the money – irresistible for many.
Lenders are also keen to demonstrate online how much they can be trusted. For example, the websites of Lending Stream, Sunny and Mr Lender are plastered with ‘five-star’ ratings from more than 11,000, 5,500 and 4,500 customers respectively. Comments such as ‘awful’. ‘disgraceful’, ‘unprofessional’ and ‘shocking’ are buried under myriad, if rather curiously worded, ‘excellent’ reports.
Membership of the Consumer Finance Association is also given as a ringing endorsement of the firm’s credentials and customer-friendly ways. But this trade body is little more than a club for lenders – though it does have a page on its website on ‘best practice’.
Some lenders lay on the charm by giving consumers friendly advice on a range of issues. For example, Satsuma and 118 118 Money include articles such as ‘how to make the perfect cup of instant coffee’, ‘hen do ideas for less’ and ‘where to head for the ultimate staycation’.
The debt charity Step Change says the average unsecured loan total for those it is trying to help stands at a record high of £13,544.
It told The Mail on Sunday: ‘Debt is a huge problem that is being made worse by the availability of these high-interest loans.
Lenders use marketing to pretend they are offering a neat financial solution when they may be part of the problem. We may have won the battle against payday outfits but the war against this new army of high-interest lenders is only just beginning.’
The charity fears far too many consumers are jumping at the ‘quick-fixes’ these short-term lenders appear to offer, when really they need debt counselling.
It adds: ‘There is a stigma about debt that makes short-term loans an easy way to avoid embarrassment. This is an ill-advised choice.’
The regulator admits a problem still exists and says it is adopting a ‘high-cost lenders supervision strategy’ to tackle the issue.
It says: ‘Our eye is not off the ball. We do not want to cut off the borrowing supply chain for those in financial need – for emergencies such as a broken washing machine or putting food on the table. The high interest rate charges in many cases reflect the risk a lender is taking that a high street bank is not willing to make. But these loans should only be viewed as short-term solutions.’
Darren Cook, of rate scrutineer Moneyfacts, said: ‘There are personal loans out there that are better than these glitzy short-term deals.’
For example Saga charges 7.9 per cent interest on a one-year £1,000 loan, costing £86.82 a month.