In 2012/2013 The Scottish Citizen Advice Bureau (CAB) service helped clients with 17,585 new issues relating to unsecured personal loans including those relating to payday lenders. This was the 6th most common issue raised by bureau clients across all areas of advice. The Citizens Advice Consumer Service answered 449 calls relating to unsecured personal loans from consumers in Scotland in the same period.
Payday loans have been a substantially increasing workload for bureaux in Scotland as clients turn to them in the face of ever increasing financial hardship. Many of these cases have strong social impacts but also raise numerous concerns as to how the payday lenders operate as a market namely:
- Consumers’ immediate financial need due to extreme hardship is impacting on their ability to make an informed decision about the best credit product for their needs.
- The failure by some payday lenders to freeze interest if the loan is cancelled within the 14-day cooling off period is allowing them to profit illegitimately.
- The speed of a payday loan is often sold as an advantage by lenders but this can often blind borrowers to the full cost of the loan and its implications for them.
- Consumers with low financial literacy use more high cost credit than those who have a better understanding of the products, resulting in this client group paying more than if they had used an alternative product.
- Payday loan companies often encourage the roll-over of debts for those in financial difficulty instead of discussing repayment plans or allowing clients to move their debt elsewhere, a key barrier to switching.
- Due diligence through credit checks and affordability assessments are not being carried out by some payday lenders meaning they are at a competitive advantage compared to alternative lenders.
- Credit brokers of payday loans are often unclear in the service they offer to consumers and which lenders they will search for on behalf of the customer. This may be distorting the level of competition in the market.