Everything you need to know about Payday loans

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.

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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!



How to get back bank charges

What can you do when banks and building societies

Banks & building societies and charges

Banks can charge you, should you go into the red. However it is worth complaining if you feel that it is unfair, for example if it was only for a couple of days and you transferred money as soon as you realised. I have done this a few times over the last 25 years. It has always worked. The only time it didn’t work first time was a couple of years ago and I then wrote to the CEO outlining my loyalty as a customer and I then got the money refunded.

moneyRemember that the bank does not have to give you this amount, I just feel the charges do not reflect anything like the extra administrative time the matter might take. The ease with which I have had the charge refunded in the past I believe shows that if you are seen to make the effort that will be acknowledged. My examples were all genuine mistakes where I had forgotten something leaving the account or, had miscalculated! Don’t be afraid to admit to making a mistake as this also goes a long way to a friendly customer services representative being understanding.

Banks and building societies treating people fairly regarding charges

Banks don’t pay out refunds of charges as easily as they used to, but they are obliged to treat customers fairly so it is worth writing to complain. You can go back 6 years. Unlikely that you have the statements but you can look online at your account for information or you can request a list of transactions for the last 6 years. Don’t ask for statements as the bank could charge you £10 per statement!

If you are in financial hardship, complain about more than one unfair charge over the years and threaten to take the matter to the Financial Ombudsman it is quite possible that you will receive a goodwill gesture. All cases where the Financial Ombudsman thinks treatment has been unfair will be looked at and the service is free so it is worth going further.

Generally speaking if the charge exceeds the amount you are overdrawn or you get stuck in debt because of the cycle of continuous charges you could take the matter to the Financial Ombudsman.

What banks can do regarding charges when you complain

In response to your complaint banks could:

Refund in full.

Refund in part. Banks should deal with your case sympathetically so if you feel that the offer is not fair, contact the bank again with an amount that you think is more appropriate and negotiate.

Ask you to fill out a form. The bank may want more information regarding your financial hardship. In this case fill out as fully as possible and return speedily as this shows that you are serious.

Require the refund be used to pay off debt. If it was just the one charge it is likely that the bank will just refund the amount into the account. However, if you are claiming for the past 6 years it may be a figure into hundreds of pounds. If your account is in debt you should accept this offer. However, if you have other debts such as utility bills or mortgage arrears incurring higher charges contact the bank and explain  the situation.

Reject but offer to help in other ways. The bank may accept that you are in financial difficulties but not offer to refund the charges, choosing to do something else such as not making charges for the following 6 months or offering a repayment plan. You could accept this offer, but if you are not happy then write again.

Reject out of hand. The bank may completely reject your request. Some banks may do this automatically for all claims as a matter of policy as many people will not pursue the matter. In this situation write again (I’d go to the CEO at this point) explaining your disappointment with the decision and threaten to take the matter to the Financial Ombudsman. If the claim is rejected again then proceed with the Financial Ombudsman. You have nothing to lose.

Further help and advice for complaining

How to complain about financial institutions various posts on banks, insurance etc. regarding your rights and how to complain

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For more information and advice on complaining about financial institutions and others and template letters see How to Complain: The Essential Consumer Guide to Getting Refunds, Redress and Results!