In the first six month of 2016, complaints to the Financial Ombudsman about payday loans more than tripled to 4,186 compared to the previous six months. The Financial Ombudsman has said this is because borrowers have become more aware of their rights.
I don’t think many people understand their rights in this area, so I asked Sara Williams, who runs the Debt Camel advice website and who is also a Citizens Advice advisor, to explain what these complaints were about and what to do about them!
What is a payday loan?
A payday loan is very short term loan at a high rate of interest. A typical example is if you borrow £200 to be repaid the next time you are paid – hence the name “payday loans”. The interest rates on these loans can often be over 1,000% APR. Sometimes the repayments can be spread over a few months.
The regulator says loans should be “affordable”
You might think that at those interest rates the loans obviously aren’t affordable, but the regulator’s definition looks at whether someone can afford to repay the loan without experiencing adverse consequences.
In other words, affordable credit can be repaid on time and still leave you able to pay all your bills and cover your normal household expenditure. If the only way you could repay a payday loan is by borrowing again, perhaps from the same lender, or by getting into more debt with another lender, or not paying the rent or a utility bills, that payday loan was not affordable.
These affordability rules have applied for a long while. The Financial Conduct Authority (FCA) introduced tighter rules for payday lending since 2014, including capping the interest, but the previous regulator, the Office of Fair Trading, had very similar rules on affordability.
In 2014 the FCA made Wonga give refunds and loan write-offs to many customers. This was the first time there was any publicity for the concept of affordability and payday lending.
The principle of affordability isn’t a special rule for payday loans. It applies to all lending, from bank loans to credit cards. But it tends to be easier to show a payday loan is unaffordable because the repayment amounts are so large, having to repay the full loan immediately, not just a small proportion each month.
Repeat borrowing is likely to be “unaffordable”
A lender can check for affordability in various ways, such as looking at your credit record and asking about your income and expenditure. But they should also take into account how much you have previously borrowed from them.
Payday loans are meant to be used when you have a temporary difficulty. If the lender can see that you have been repaying their loan and then borrowing again (or you kept extending the term by “rolling” the loan) for month after month then this doesn’t sound like a short term problem.
In this sort of situation that the Financial Ombudsman is often deciding that the lending was unaffordable and that the lender should have realised this after the first few loans. In a typical decision, the Ombudsman says that the interest paid on the unaffordable loans should be refunded, 8% statutory interest should be added and the loans should be deleted from your credit record.
How to complain
If you have borrowed from a payday lender and you think your loans were unaffordable, you should think about complaining to the lender.
Email is the best way to do this, so you have a record of what you have said and a date-stamp on it. I have published a list of emails to use for complaints to payday lenders.
Your complaint needs to tell your story, explaining why you feel the loans were unaffordable for you, and ask for a refund of interest paid. This doesn’t need to be complicated, you don’t need to quote laws or calculate the amount of a refund. If you would like to see an example template letter, there is one on my How to ask for a payday loan refund page.
Follow the Tips for complaining.
At the bottom of that page there are a lot of comments from people making these sorts of affordability complaints. It’s a good place to look if you want to get a feel for what sort of reply you may get from the lender and how long it might take.
If the lender says No or doesn’t reply
If you get a rejection from the lender, or you are offered an amount of money which seems very low compared to the amount of interest you paid, then have a think about your case. If you just had one or two loans from the lender and you repaid them on time, it probably isn’t worth taking this any further.
But if you feel that you were caught in “the payday loan trap”, having to keep borrowing every month, or if you told the lender you were in difficulty and they ignored this, then take your case to the Financial Ombudsman. Also do this if you don’t get a reply within eight weeks – that is the time the Ombudsman says you have to allow the lender to resolve your complaint.
It’s easy to put in a complaint to the Financial Ombudsman – you can do it online or over the phone. The process isn’t speedy, it will usually take a few weeks for someone called an adjudicator to start looking at your complaint. It can take several months if the payday lender is slow about replying to questions from the adjudicator. Most complaints are settled by the adjudicator, with both sides agreeing, but some go to the second stage where they are looked at by an Ombudsman.
The Financial Ombudsman publishes anonymous details of some complaints which you can look up if you would like to see more about the cases that are being considered.
Payday lender regulation has improved
After the FCA became the regulator for payday lenders, it introduced important protections:
- from July 2014, lenders were not allowed to “roll” a loan more than twice;
- new restrictions on their ability to take money directly from someone bank account via Continuous Payment Authorities; and
- from January 2015, the cost of payday loans was capped at a maximum of 0.8% per day and a total cost cap of 100% to protect borrowers from escalating debts.
These measures have removed many of the worst excesses of the payday loan market in Britain. They have also had the desirable side effect of making some of the least scrupulous lenders decide to exit the market.
But although standards have improved a lot, the Citizens Advice report Payday loans after the cap – Are consumers getting a better deal? in August 2016 found that many payday lenders are still not conducting proper affordability checks. And borrowers who didn’t have an affordability check were nearly twice as likely to have trouble repaying their loan as those who remembered being asked about their ability to repay.
Adequate affordability checks are an essential safeguard for borrowers. It is good that the Financial Ombudsman is recognising this and giving redress to people who were caught in the payday loan trap.
For advice, guidance, tips, consumer rights and laws on other areas for consumer GET THE BOOK! How To Complain: The ESSENTIAL Consumer Guide to Getting REFUNDS, Redress and RESULTS!