Payday loans being used to feed desperate families, charity says

http://www.theguardian.com/money/2013/oct/01/payday-loans-feed-families-report

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Borrowers are turning to payday lenders to pay for essentials like food, energy and housing costs, and are being granted loans even when they are not in a position to pay them back, according to research by a debt charity.

Although the loans are marketed as a quick, flexible way to get cash for items like home improvements and holidays, almost four out of five people who turned to Christians Against Poverty (Cap) with problem debts, including payday loans, said they had used them for food. Half said they had paid gas and electricity bills with them, while a third had borrowed to meet rent or mortgage costs.

The payday loans market has boomed in recent years and many high streets now have a plethora of lenders. Borrowing is designed to be over a period of days or weeks, and interest rates and charges are high so any debts can quickly snowball. Critics also warn that borrowers can get trapped in a spiral of debt, using new loans to repay existing borrowing.

The £2bn sector is currently under scrutiny of the Competition Commission, which is considering whether firms are offering consumers a fair deal. Later this week the Financial Conduct Authority will outline how it intends to police payday lenders when it begins to regulate them in April 2014.

Cap asked 1,500 clients seeking debt counselling if they had taken payday loans. Just over a fifth (22%) said that they had. More than 80% had taken out at least two, and 16% said they had lost count of how many they had used.

Lenders claim to carry out scrupulous checks before they offer loans, but Cap said a fifth of those using them had not been asked if they were working and almost three-quarters had not been asked about their outgoings.

Cap's chief executive, Matt Barlow, said: "This evidence shows that people taking out payday loans are not, typically, doing cosy house repairs as most payday lenders would have us believe. People who take out this expensive sort of credit are hungry, worried about keeping warm and becoming homeless."

The charity said some firms had improved their practices, and that generally the larger, better-known lenders were the ones who were leading the way, while smaller firms tended to be the most unscrupulous.

Barlow said: "These findings show irresponsible lending still loans large and those companies give the better firms a very bad name."

One Cap client, Sarah Johnston, fell into financial difficulties after she broke her leg and had problems working as a carer. She turned to payday loans after she found herself trying to feed three people on a budget of £30 a week. "Payday loans were an easy way to get money," she said. "I used two companies just to make ends meet." After the lenders began to chase her for money, her partner and I cut back on meals to repay the debts. "We once ate in the dark with just a candle as we could not afford electricity until the next day," she said.

Another borrower who turned to Cap for help, Andrew Williams, fell into debt when his wife lost her job. "We plummeted into debt and despair," he said. "We were just trying to find a way out and began taking out payday loans." Williams, from Merthyr Tydfil in Wales, said the companies he borrowed from did ask about his income but never questioned his spending or household budget.

The Consumer Finance Association, which represents some of the biggest payday lenders, said the stories uncovered by Cap were disappointing. Its chief executive, Russell Hamblin-Boone, said: "We stand shoulder-to-shoulder with Cap in its call to protect vulnerable customers from rogue lenders.

"With the FCA about to unveil the new rulebook for consumer credit providers, the CFA remains committed to driving out irresponsible lending practices."

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