Citizens Advice warns payday lenders could prey on Universal Credit claimants
Payday lenders could cash in on the huge upheaval caused by the new Universal Credit system as 61% of loans still come without proper checks to assess whether borrowers can afford to repay, says Citizens Advice.
The squeeze on living standards has caused a boom in payday lending as people turn to short-term loans to cover emergency costs and in some cases pay for everyday essentials. Difficulties budgeting under Universal Credit could make this worse.
Evidence from Citizens Advice reveals irresponsible lending is intrinsic to the industry and despite promises 12 months ago by lenders that they will clean up their act, they have failed to improve.
New 12-month figures from the national charity’s payday loan tracker, published today, reveals 3 out of 4 borrowers found it difficult to repay their loan. In 84% of cases lenders broke their promise to freeze interest and charges for those who say they are struggling.
The tracker is monitoring the performance of payday lenders against the pledges made in the industry customer charter which launched on 26 November 2012. A year on, Citizens Advice reveals lenders have broken 12 out of 14 of the promises to treat customers fairly.
Universal Credit introduces significant changes in how people receive their benefits. Instead of getting money weekly, it will move to monthly payments. Citizens Advice fears that, without any viable alternatives for short-term credit, people on Universal Credit who are unable to cope with monthly budgeting and reduced benefits, could end up in serious debt if they turn to payday loans to get by. Already 9 in 10 people, who took part in a CAB survey, say they don’t feel ready for Universal Credit.
A third of people who got help from a Citizens Advice Bureaux about payday loan debts are out of work. The figures are from a new analysis, of a sample of bureaux clients, who sought help with payday loan problems in the last seven months.
Citizens Advice is calling on the Government to encourage banks to offer consumers an alternative to payday loans through a short-term micro-loan. It’s also important Ministers look at the need for fortnightly payments as 83% of CAB clients in Universal Credit pilot areas say they will struggle to deal with monthly payments.
Citizens Advice Chief Executive Gillian Guy said:
“The changes brought in by Universal Credit will be a seismic shift for many people and I am concerned that payday lenders will see this as an opportunity to prey on those who struggle to adapt to the new system. Lenders’ appalling inability to assess whether loans are actually affordable means that people on benefits can easily get into serious debt as lenders unwisely hand over a loan.
“Universal credit will be a shock to the system for many households as people move from weekly to monthly payments. Citizens Advice Bureaux are seeing people who are topping up their income with a payday loan to cope with the rising cost of living. I am really concerned that this problem will only escalate under Universal Credit as people struggle to adapt.
“The Government needs to make sure people can cope with the move to Universal Credit by giving people the option for fortnightly instead of monthly payments, and encouraging banks to offer short-term micro loans so people have more choice.
“It’s important the Financial Conduct Authority protects people from predatory payday lenders by making sure its plans, to force proper checks, make it into the credit rule book and lenders abide by them.”
Twelve month findings from Citizens Advice payday loan tracker are below. This is from customer feedback on over 4,000 payday loans from over 100 different payday lenders which was provided by between 26 November 2012 and 18 November 2013.
| Citizens Advice survey questions to gather evidence on compliance to the code | Loans that did not comply |
|---|---|
| To make clear how much a loan will cost in total | 21% |
| Explain how the loan will be repaid | 17% |
| Establish if the borrower can afford to pay back the loan | 61% |
| Ask the borrower to provide documents to prove they can afford to repay the loan | 88% |
| Warn that a payday loan should not be used for long-term borrowing or to deal with money troubles | 57% |
| Explain how to make a complaint | 81% |
| Make it easy to contact them if the borrower is struggling to repay | 54% |
| When people are having difficulty repaying, treat them sympathetically | 83% |
| Freeze interest and charges for people struggling to repay loans | 84% |
| Tell borrowers that free debt advice is available from charities | 91% |
| Don’t put pressure on borrowers to extend loans | 70% |
| Highlight the risks of extending a loan | 82% |
| Explain costs of extending a loan | 64% |
| Check borrowers could afford to pay back the loan if it was extended | 94% |
-ends-
Notes to editors
- Citizens Advice analysed customer feedback on 4,031 payday loans from over 100 different payday lenders. Feedback was provided between 26 November 2012 and 18 November 2013 through an online survey, questionnaires in bureaux and face to face surveys on high streets. The study was promoted widely through national media and other organisations including Nationwide, Which?, Toynbee Hall and other debt charities. The tracker monitors whether lenders are abiding by their own customer charter.
- The below table reveals the promises lenders failed to keep, based on evidence from the Citizens Advice payday loan tracker, CABs and the consumer service.
- The 9 in 10 figure of people who say they are not ready for Universal Credit is from a Citizens Advice surveyed over 1,700 of its clients, in Birmingham, Ynys Mon, North Dorset, who will eventually be moved onto Universal Credit.
- Citizens Advice did a detailed analysis of a sample of 9,313 CAB clients who got help with a payday loan problem between April and October 2013.
- Citizens Advice carried out a survey with clients in the new benefit pilot areas, Hammersmith, Bath, Shotton, Harrogate and Rugby, and found 83% are not ready to budget with monthly payments.
- The Citizens Advice service comprises a network of local bureaux, all of which are independent charities, the Citizens Advice consumer service and national charity Citizens Advice. Together we help people resolve their money, legal and other problems by providing information and advice and by influencing policymakers. For more see the Citizens Advice website.
- The advice provided by the Citizens Advice service is free, independent, confidential, and impartial, and available to everyone regardless of race, gender, disability, sexual orientation, religion, age or nationality.
- To find your local bureau in England and Wales, visit www.citizensadvice.org.uk. You can also get advice online at www.adviceguide.org.uk
- You can get consumer advice from the Citizens Advice consumer service on 08454 04 05 06 or 08454 04 05 05 for Welsh language speakers
- Citizens Advice Bureaux in England and Wales advised 2.1 million clients on 6.6 million problems from April 2012 to March 2013. For full 2012/2013 service statistics see our quarterly publication Advice trends
- Citizens Advice service staff are supported by more than 22,000 trained volunteers, working at over 3,000 service outlets across England and Wales.