OFT to investigate payday loan companies

Posted:

24 February 2012

by Luke Thomas

The Office of Fair Trading is considering regulation of payday loan companies, pending the results of their investigation into the industry’s methods and conduct.

The OFT’s research, which will take them to the heart of 50 payday loan firms, is designed to assess the reality behind claims that such lenders prey on those who are desperate for money but are unlikely to be able to make the repayments after borrowing.

Payday loan companies are well-known for the high interest rates levied on their short-term loans, which are advertised as a means of tiding over your financial concerns until your next payday, hence the name. Due to this, it is an oft-cited concern that many individuals become ensnared in a “payday loan trap” whereby the interest stacks up to such a degree that they have little hope of ever paying it off.

However, the OFT is on record as having said that they do not necessarily want to levy restrictions on how high an interest rate is appropriate for such businesses, with a report in 2010 stating that payday loan companies filled a gap in the market and provided a useful service for those who needed a way to borrow some money at short notice.

Despite this, recent reports have suggested that some payday loans may be encouraging people to take out loans which are not appropriate for their circumstances and which risk forcing them into a situation where they are left paying off the interest on loans indefinitely.

There have also been a number of complaints about how borrowers are treated when they find themselves in financial difficulty, which is likely to be a frequent occurrence given the target market.

David Fisher, head of the OFT, commented “The payday sector has grown considerably since the OFT's high cost credit review in 2010.

“This, combined with the current tough economic conditions, makes it the right time for us to review the industry and improve protection for consumers.”

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