Little Compensation for WageDay Advance Borrowers

The BBC reports that hundreds of thousands of people who were mis-sold payday loans will receive a fraction of the compensation they are entitled to after WageDay Advance collapsed.

The company had given loans to about 800,000 people but went into administration earlier this year.

In a case that mirrors the demise of Wonga, the company folded after being hit by a wave of compensation claims for mis-sold loans.

Customers are now receiving emails to explain how much they owe or are owed.

However, now the company is in administration, those who have paid off loans but are entitled to compensation have become unsecured creditors. They can only expect a fraction of the full compensation payout.

One In 20 Households Rely On Payday Loans

The Telegraph reports that the Aviva Family Finances Report published today notes that one in 20 households is "relying" on payday loans to get by.

Two weeks ago the Office of Fair Trading referred the £2BN industry to the Competition Commission, after uncovering evidence of "widespread irresponsible lending".

Last week the Financial Conduct Authority warned that it was considering a total advertising ban on payday loan companies as one of the options when it takes over regulation of the sector next April.

Controls and increased regulation are all very well. However, if hard pressed families who are not well served by mainstream lenders are unable to raise loans from payday loan companies their only other resort will be loan sharks.

Payday Loan Companies Drinking In The Last Chance Saloon

The Office of Fair Trading (OFT) has come up with the unremarkable conclusion that there is evidence of widespread irresponsible lending by payday lenders.

The OFT has targeted the leading 50 payday lenders (which account for 90% of the market), and has proposed to refer the payday lending market to the Competition Commission.

Clive Maxwell, OFT chief executive, is quoted by the Telegraph:

"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 refinanced deals where unexpected costs can rapidly mount up."

The review carried out by the OFT noted that particular problem areas included; lenders failing to adequately assess affordability before lending, failing to explain properly how payments will be collected and aggressive debt collection practices.

The OFT noted that:

"Payday lenders' revenues are heavily reliant on those customers who fail to repay their original loan on time."

The OFT have now presented the 50 with the "last chance saloon option", namely that they must take "rapid action" to address the OFT's concerns and show within 12 weeks that they are fully compliant.

Any firms which fail to cooperate will face enforcement action.

Whilst the action will, to some extent, rein in the mainstream payday lenders there still remains those who operate outwith the law; namely loan sharks. Unfortunately those people, so desperate that they will borrow from payday lenders that charge extortionate rates of interest, who are denied credit from payday lenders in the future will be forced to go to loan sharks.

The fundamental problem is not that of extortionate interest rates, but of a large swathe of society that has run out of credit, cash and options.

The Naked Greed of Banks

Banks still seem to be operating with their heads in the sand.

"A customer borrowing £100 for 28 days without the consent of Santander would repay £200, for example.

That is the equivalent annualised percentage rate, or APR, of 819,100%.

Comparisons between banks and so-called payday lenders showed that the annualised percentage rate charged for borrowing £100 over 28 days varied from 969% to 819,100%.....

No payday loan lender charged an APR of more than 5,000% but two banks - Santander and Lloyds TSB - charged an equivalent APR of more than 300,000%. 

Santander told the BBC: "It's is confusing to compare payday loans with overdrafts on current accounts because an unauthorised overdraft charge is for unauthorised use of a current account while a payday loan is an agreed loan facility."

Barclays would charge a customer using a personal reserve - a pre-agreed emergency borrowing facility - £22 for every five consecutive working days they were in it. This means customers would pay £88 on top of the £100 capital after 28 days - an equivalent APR of 366,000%."

Source BBC

Loan Sharks

The ongoing drought of cheap loans and mortgages is forcing already heavily indebted people into the arms of loan sharks, who charge interest rates up to a staggering 1000%.

Known as "pay day loans", they are taken out by the hapless debtor to provide short term cover until pay day.

The Times reports that the number of deals taken out in the UK has risen by more than 130% since last August.

Payday UK, Express Finance and Pounds Till Payday offer loans of up to £1,000. Payday UK demands that £125 be repaid for a £100 loan, or £937.50 for a £700 loan. The loan is usually paid off within a couple of days, as soon as the borrower's wages are paid into their account.

Payday UK has a typical APR of 1355%.

Needless to say, by borrowing money at such extortionate rates of interest in this way, the hapless debtor is in fact making his/her situation far worse than it already is.