Payday loan complaints double in two years

The number of complaints made against payday lenders has more than doubled over the past two years, new figures have revealed, as a watchdog urges customers struggling with debt to seek help.

The Financial Ombudsman Service has revealed that complaints it receives about the controversial short-tern, high cost loan companies have reached record levels. 

Complaints rose to 794 in the financial year 2013-14, up from 296 the previous year. Over the same period it received 5,395 inquiries.

Many complaints were raised over poor service and administration, as lenders refused to help people struggling to pay. Two-thirds of all cases concluded in the consumer’s favour.

With around 10 million payday loans taken out each year, this may seem like an insignificant amount. However, the ombudsman warns that the official complaints are “only the tip of the iceberg” because many customers are unaware of their right to complain. 

Therefore, the ombudsman has urged customers worried about debt to confront the “shame factor” and ask for help. 

“We often hear from people who took out a payday loan as a desperate last resort and blame themselves when the debt starts to spiral out of control,” said principal ombudsman Caroline Wayman.

“It’s important that people don’t feel trapped with nowhere to turn because of the stigma associated with short-term lending.

The ombudsman has also demanded that the payday loan industry improves its approach to customers’ concerns. The debt charity StepChange received 66,557 inquiries about payday lenders last year, and has also called on firms to clean up their act. 

“The payday loan industry has been a problem for many years,” said StepChange chief executive Mike O’Connor.

“The fact that most complaints against payday loan companies are upheld is further evidence that when it comes to acting in the best interests of consumers, in many cases they fail to do so.” 

Wonga was the only firm that had received enough complaints to be publicly named, the ombudsman said.

The lender was recently fined £2.6 million by the Financial Conduct Authority for posing as non-existent law firms and sending letters threatening legal action to customers in arrears, between 2008 and 2010.

The industry as a whole has also been subject of recent criticism, after the Competition and Markets Authority raised concerns that customers are paying £5 to £10 over the odds per loan because of a lack of competition.

As of October last year there were at least 90 payday lenders operating in the UK, but the three largest lenders – including Wonga – accounted for about 70% of total revenue. 

As a cheaper and more ethical alternative to payday lenders, many commentators have recommended that consumers turn to credit unions. 

“As is demonstrated in countries like the US and Canada where more than 40% of people use credit unions, the British sector has great potential to provide an ethical financial option and provide healthy competition in financial services,” Mark Lyonette, chief executive of the Association of British Credit Unions, said last month.

“This can be through providing an affordable and responsible alternative to payday and other high cost lenders or providing great value loans and savings without the need to pay a return to shareholders.” 

Labour leader Ed Miliband has also pledged to raise around £20 million a year from lenders such as Wonga, either from a 1% levy on their balance sheet or a 10% tax on their profits, and give the proceeds to their credit union rivals.

Photo: Images of Money via Flickr

Further reading:

Wonga faces charges of £2.6m for impersonating law firms

Lack of competition in payday loan market costing customers

Financial regulator to investigate payday loan debt collection

Miliband pledges to force payday lenders to ‘pay back to communities’

Credit unions: a growing movement