Money Management

Pay Day Loans: Rogue Lenders or Necessary Evil?

Much has been written recently of the growing popularity of Pay Day Lenders, but some of the stories circulating regarding their practices are so worrying that you would be forgiven for believing it is an industry out of control and poorly regulated. Here takes a look at what this means for you.

A good example emerged earlier this year in relation to Wonga, the most high profile of all pay day lenders. The Office of Fair Trading (OFT) slated them for what was said to be aggressive and mis-leading debt collection practices. They were found to have been collecting debts by suggesting customers had committed fraud and threatening to report them to the police. The punishment for Wonga was public censure, but they were warned that if the conduct was repeated they could face a fine of up to £50,000.

Then the OFT stripped another lender of its consumer credit licence and fined it £544,505. This company, MCO Capital, was found to have breached money laundering rules by allowing fraudsters to use the details of up to 7,000 individuals to make false applications. The company then, even though it knew some of the loans were fraudulent, continued to pursue the real individuals for the money.

The problem is payday lenders are becoming increasingly popular as many consumers struggling with rising living costs try to make ends meet. The National Debt line, a national charity, has reported that the 116% increase in calls it has experienced is largely down to customers who have taken out pay day loans.

So should you avoid using them?

Well the short answer is yes, if you can afford to. There are, however, circumstances when a payday lender may be cheaper than going to your normal bank for a short term loan, especially if it means paying the banks unauthorised overdraft fees.

However, what is key is never to borrow more than you need and make sure you can pay the money back when it is required. One in three pay day loans are made to “flip” or “roll over” a loan which someone couldn’t pay back. When you do this additional charges are added and interest begins to get added rapidly.

Efforts are now being made to improve regulation of pay day lenders and a new voluntary code is due to come into force in November of this year that should cover over 90% of the lenders. There is still a strong suspicion, however, that there are other companies, like MCO Capital, still operating and using rogue practices. It’s also a sobering thought to realise that MCO Capital are still lending despite having their licence revoked. They have 28 days to appeal the decision of the OFT against them and if they do, it could take up to 2 years for that process to be completed: in the meantime it will be business as usual.

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