Consumers relying on payday loans are getting trapped in a downward spiral of debt caused by exorbitant penalty charges because they cannot afford to pay back the loan on time, new research reveals.
The report concluded that consumers need to be "protected from extortionate charges and dodgy marketing techniques."
More than 60 per cent of people who took out payday loans were using the money to pay for household bills or buying other essentials like food, nappies and petrol, a survey by Which? shows.
One in four who had taken out loans said they had been hit with hidden charges such as high fees for reminder letters, while one in five were unable to pay back their loan on the agreed date, according to the watchdog’s study.
Which? detailed the charges of lender QuickQuid, who charge £12 for a missed payment and Quid24 who charge £25 for each of its first four letters to borrowers and £50 for a reminder on the 10th day.
A third of people polled said they had experienced greater financial problems as a result of taking out a payday loan, with 45 per cent of them being hit with unexpected charges.
Which? said the debt trap is being compounded with 57 per cent of borrowers being encouraged to take out further loans and 45 per cent rolling over their loans at least once.
Some payday loan company websites failed to provide any terms and conditions or references to free debt advice, the watchdog said.
Executive director of Which?, Richard Lloyd, 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 from extortionate charges and dodgy marketing techniques.”
However, John Lamidey, chief executive of the Consumer Finance Association, a trade body which represents several payday lenders, said: "Despite the report's concerns that payday borrowers may get 'hooked', the fact is that payday loans actually make up a tiny proportion of overall consumer debt.
"In fact, for every £100 of problem debt, payday loans never make up more than £1.20 of that debt, whereas credit cards and unsecured (mainstream) loans together account for between 60% and 70% of unmanageable debt.
Sarah Brooks, director of financial services at Consumer Focus, said the research “poses many uncomfortable questions” about the growing payday loan sector.
“Millions are turning to these loans in the current economic climate and it is usually those on lower incomes that suffer most,” she said.
“This [research] should give further incentive, if any is needed, for the Office of Fair Trading to act quickly to protect consumers from spiralling debt.”
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