Wonga may not be anymore, but beware of new lenders looking to rip you off
From the wreckage of payday loans, a new breed of loan sharks is emerging – and it is preying on the cash-strapped and vulnerable.
A Mail on Sunday investigation today reveals that many short-term lenders are demanding borrowers pay off loans with crippling interest charges.
Last week we took a look at how much a £ 1,000 loan would cost a borrower from 12 lenders promoting their wares on the internet.
Tackling the Vulnerable: From the Wreck of Payday Loans, a New Breed of Usurers Emerges
The information was hard to find, but once discovered the results were shocking. They reveal that borrowers are asked to repay between £ 1,237 and £ 2,000 – the maximum allowed by current regulations – on a short-term loan, usually for six months.
The results of our survey shocked some debt experts, who went on to say that loans this easy to get are fueling a youth debt crisis. They believe that the regulation of these loans is too lax and that the current system, overseen by the Financial Conduct Authority, “does not work”.
Borrowers, often young families, are drawn to stylish advertisements and welcoming websites that feature cartoons and promise quick fixes. But the reality is that rather than alleviating money worries, they are forcing many customers into even greater difficulties.
Once these new loan sharks sink their teeth into a borrower’s bank account, they won’t let go until they’ve taken their pound of flesh – and more. After interest and charges, the total amount repaid can be double the amount borrowed. Non-compliance with payments can end with a visit to the debt collectors.
The Financial Ombudsman Service recently revealed that complaints about these new lenders had increased by 130% in one year, many of them acting “unacceptably”. He said some operators were lending money to already vulnerable and debt-ridden people, which made their situation worse.
Others did not provide clear information about the charges. Some borrowers, he said, were struggling with up to ten separate loans.
The Ombudsman told the Mail on Sunday: “Often money is loaned to people when they have little means to repay it. They then find themselves trapped in a cycle of indebtedness. Lenders can turn to debt collectors if they don’t get the money, turning an already dire situation into a real personal crisis.
“From the number of complaints we have received, it appears the system is not working.”
The Financial Conduct Authority hoped it had killed the so-called payday loan companies four years ago when it introduced a tough new regulatory regime. This was in response to the fact that Wonga was raking in millions of pounds in profit a year by lending at very high interest rates. More importantly, he said that no lender would be allowed to charge more than 100% of the amount borrowed in fees and interest on high-cost short-term loans with terms of up to one year.
As a result, this now means that a loan of £ 1,000 should never cost more than £ 2,000. But the doubling is done over five or six months, generating big profits for the lenders.
Our survey also found that providers prevent borrowers from figuring out exactly what to pay unless they apply for a formal loan.
For example, Lending Stream wouldn’t say how much it actually costs to borrow £ 1,000 unless an online form is filled out providing bank details.
The Mail on Sunday called Lending Stream, to be told they could not give more than an “approximate amount”.
On a call this figure was given at £ 317.14 per month for six months, but when the newspaper rang the next day it was quoted at £ 333 per month – a difference in total refunds of over £ 95. Call center staff were unable to offer the fixed interest rate.
While companies like 118 118 Money have budgets of several million pounds to spend telling you how easy it is to get a loan, they are less willing to tell you how much it will cost.
For example, borrowing £ 1,000 can cost anywhere from £ 98 to £ 119 per month for a year, or £ 1,176 or £ 1,428. It won’t tell you exactly how much you need to pay until – again – bank details are provided.
The idea is that once you’ve provided these details, you’re just one click away from getting the cash – irresistible to many.
Lenders are also keen to demonstrate online how trustworthy they can be. For example, the websites of Lending Stream, Sunny and Mr Lender are rated “five stars” by over 11,000, 5,500 and 4,500 customers respectively. Comments such as “horrible”. “Shameful”, “unprofessional” and “shocking” are buried under a myriad of “excellent”, albeit rather curiously worded, reports.
Membership in the Consumer Finance Association is also given as a resounding endorsement of the company’s credentials and its user-friendly manners. But this professional body is little more than a club of lenders – although it does have a “best practices” page on its website.
Some lenders are charming by giving consumers user-friendly advice on a variety of issues. For example, Satsuma and 118 118 Money contain articles such as “how to make the perfect cup of instant coffee”, “chicken ideas for less” and “where to go for the ultimate vacation”.
The Step Change charity says the average total of unsecured loans for those it is trying to help has hit a record high of £ 13,544.
He told the Mail on Sunday: “Debt is a huge problem which is made worse by the availability of these high interest loans.
Lenders use marketing to pretend they are offering a great financial solution when they may be part of the problem. We may have won the battle against payday lenders, but the war against this new army of high interest lenders has only just begun.
The charity is concerned that far too many consumers are jumping on the “quick fixes” these short-term lenders seem to offer when they really need debt advice.
He adds, “There is a stigma about debt that makes short-term loans an easy way to avoid embarrassment. It is a poor choice.
The regulator admits that a problem persists and says it is adopting a “high-cost lender monitoring strategy” to tackle the problem.
He said, “Our eye is not outside the ball. We don’t want to interrupt the supply chain with loans for those in financial need – for emergencies like a broken washing machine or putting food on the table. High interest rate charges in many cases reflect the risk that a lender takes that a major bank is unwilling to take. But these loans should only be seen as short term solutions.
Darren Cook, Moneyfacts Rate Monitor, said: “There are personal loans that are better than these glitzy short-term deals.”
For example, Saga charges 7.9% interest on a £ 1,000 one-year loan, or £ 86.82 per month.
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