People taking on payday loans run the risk of entering into a spiral of debt management problems that could prove very difficult indeed to escape from, according to a report on the subject from the consumer watchdog Which?
The organisation is keen to see consumers made more aware of the potential pitfalls of using payday loans after its own research found that around a quarter of people who use such services find themselves hit with “hidden charges” at some point during the process. Meanwhile, roughly a fifth of respondents to the Which? poll said they found themselves unable to pay back their short-term loans on time.
According to the watchdog, the payday loan industry in the UK is not currently being regulated in a way that offers suitable protection to consumers, citing “extortionate charges and dodgy marketing techniques”. Part of the problem from the consumer point of view is that a majority are using payday loans to fund everyday expenditures like grocery shopping or to pay off household bills.
Richard Lloyd, executive director of Which?, said: “With 1.2 million people taking out a payday loan last year, it is unacceptable for this rapidly growing number of people to be inadequately protected. People are getting caught up in a debt trap, whacked with high penalty charges, or encouraged to roll over payments and take out more loans at inflated rates.”
Lloyd called on the government to step in and take action to protect borrowers who are struggling to manage their finances effectively and are finding matters made worse by the high levels of interest generally charged by payday loan providers. He suggested that lending costs should be capped and more affordable credit alternatives should be made available.
Perhaps a more prudent route to financial equilibrium for many is the option of an unsecured personal loan. Shopping around for the best deals available is a crucial part of the process of course and putting together a realistic long term strategy is essential. Short-term lending is not inherently unsound financial management but as the latest Which? research suggests a sizeable proportion of borrowers taking on payday loans find that even the best laid plans do often go awry.
