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Payday loan cap needs to be coupled with more choice for consumers

25 November 2013

As the Government announces a cap on the cost of a payday loan, Citizens Advice highlights the need for reforms in the market and for banks to offer an alternative, such as a short-term micro-loan.

Citizens Advice Chief Executive Gillian Guy said:

“This is a cap on the exploitation of people struggling with the rising cost of living. Payday lenders have failed to stick to their own promises to treat customers fairly. The Government's plan to cap the cost of loans only goes to show how out of control the industry is.

“The extortionate interest rates, hidden charges and lack of financial checks have pushed many payday loan customers into serious financial hardship. As our new figures out today show, three in four people who take out payday loans get into difficulties.

“Citizens Advice has always been clear that any cap on payday loans must be a cap on the total cost of credit. Limiting interest rates alone would allow lenders to pile on excessive costs elsewhere, so the Government is spot on in deciding to tackle the overall cost. Ministers also need to look at opening up the market so there is more choice for consumers.

“To truly tackle the cost of payday loans, there needs to be more competition in the payday loan industry. As it stands lenders are competing on the speed of loans as opposed to actual costs. Banks are still shunning their responsibilities to offer their customers alternatives to payday loans. The Government needs to put pressure on traditional lenders to introduce responsible short-term micro-loans.

“Government must also tackle the underlying need for payday loans and ask – what is driving people to short term credit in the first place? 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. Rising energy prices, food costs and shrinking incomes means that more and more people will turn to short-term credit to help them get by.”

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 12month figures from the national charity’s payday loan tracker, published today, reveal 61% of loans still come without proper checks to assess whether borrowers can afford to repay. It also finds 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.

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 codeLoans that  did not comply
To make clear how much a loan will cost in total21%
Explain how the loan will be repaid17%
Establish if the borrower can afford to pay back the loan61%
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 troubles57%
Explain how to make a complaint81%
Make it easy to contact them if the borrower is struggling to repay54%
When people are having difficulty repaying, treat them sympathetically83%
Freeze interest and charges for people struggling to repay loans84%
Tell borrowers that free debt advice is available from charities91%
Don’t put pressure on borrowers to extend loans 70%
Highlight the risks of extending a loan82%
Explain costs of extending a loan64%
Check borrowers could afford to pay back the loan if it was extended94%

Notes to editors

  1. 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.
  2. 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.
    Lenders’ promisesIs industry sticking to promise?
    1Act fairly, reasonably and responsibly in all our dealings with you.No
    2Not pressurise you to enter into any loan agreement or to extend (‘roll over’) the term of your existing loan agreement.No
    3Tell you that a payday or short-term loan should be used for short-term financial needs and is not appropriate for long-term borrowing or if you are in financial difficultyNo
    4Tell you how the loan works and the total cost of the loan (including an example of the price for each £100 borrowed, together with fees and charges) before you apply.Yes
    5Check whether the loan is suitable for you taking account of your circumstances.No
    6Carry out a sound, proper and appropriate affordability assessment and credit vetting for each loan application and before the loan is extended (rolled over), to check you can afford the loan.No
    7Explain in general terms what types of information we will consider in making a decision, if you ask us to.Unknown
    8Explain how we will communicate with you during the term of the loan, how payments will be deducted from your bank account and how you can contact us by phone, email or online.No
    9Set out clearly how continuous payment authority works (if we use it) and your rights to cancel this authority, so you can decide if this type of repayment is acceptable to you. We will remind you that if you cancel, you will still owe any outstanding debt and will need to provide an alternative method of repayment on the due date to avoid going into default.No
    10Always notify you by email, text, letter or phone at least 3 days(1) before attempting to recover payment using continuous payment authority No
    11Deal with cases of financial difficulty sympathetically and positively and do what we can to help you manage what you owe. No
    12Freeze interest and charges if you make repayments under a reasonable repayment plan or after a maximum of 60 days of non-payment. No
    13Tell you about free and independent debt counselling organisations who can also help you.No
    14Tell you about our complaints-handling procedure when you take out a loan or whenever you ask us to. We will also include details about our complaints procedure on our website or make them available at our business premises (where appropriate). No
  3. 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.
  4. 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.
  5. To find your local bureau in England and Wales, visit You can also get advice online at
  6. 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
  7. 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
  8. Citizens Advice service staff are supported by more than 22,000 trained volunteers, working at over 3,000 service outlets across England and Wales.