Payday lenders still failing to carry out credit checks on all borrowers

Some payday lenders are still failing to carry out basic checks to make sure borrowers can afford to pay back their loans, new Citizens Advice research has uncovered.

Over a quarter of payday loan borrowers (27%) who responded to a survey by Citizens Advice said they were not, or could not remember being asked any questions about their financial situation or ability to repay when taking out a loan.

Those who did not go through credit checks were nearly twice as likely to have trouble repaying their loan as those who did remember having checks, the charity says.

Meanwhile, a quarter (27%) of local Citizens Advice advisors said inadequate credit checks were the biggest cause of problems to the people they help with payday loans.

In a new report, Citizens Advice investigates the state of payday lending since the Financial Conduct Authority (FCA) introduced a cap on payday loan interest rates and fees in January 2015.

Since then Citizens Advice has helped people with 45% fewer payday loan problems - from a monthly average of 2,821 issues pre-cap to 1,534 afterwards. Citizens Advice also finds that since October 2013 nearly 40% of payday loan firms have left the market.

Despite this, the charity finds that some payday lenders are flouting the FCA’s responsible lending guidance, which says firms must take “reasonable steps” to make sure customers can meet repayments without experiencing financial difficulty.

Citizens Advice helped one 33-year-old man who was granted a payday loan following checks despite suffering from depression and alcoholism, having no permanent address, being previously declared bankrupt and having only benefit income.

The new evidence is based on a survey of more than 400 people who have attempted to use payday loans since January 2015. The report finds that half of these borrowers are still getting into difficulty paying back their loans. This increases when looking just at people who did not go through credit checks with 78% getting into difficulty compared to 40% who did have checks.

Those surveyed are still finding it easy to get a payday loan, with 98% of people saying this. People said online and phone applications were easy methods - with few requiring credit checks. In some cases people assumed credit checks were being carried out but were not always certain.

The report also highlights new methods being used to collect payments from people’s accounts. Citizens Advice found a number cases where a payday lender asked people to share their internet banking details including login, password and memorable characters so a lender could directly access their account and adjust funds without advance permission from the borrower.

The charity helped one woman who was asked to share her online bank details when taking out a £180 payday loan. Her lender went on to add additional loans into her account every time her balance dropped below £50, or to take a loan repayment when the account had more funds.

Citizens Advice supports the FCA’s measures to crack down on payday lenders and recognises that there have been significant improvements within the market.  But believes there is an opportunity to go further in tightening its rules on lending - forcing all firms to carry out rigorous checks on people’s finances before agreeing new loans. This would require lenders - at the very least - to find out how much potential borrowers earn and spend before approving their applications.  

Gillian Guy, Chief Executive of Citizens Advice, said:

“Irresponsible behaviour by some payday lenders is trapping people with loans they can’t afford.

“New measures and guidelines from the FCA have helped to clean up the market and the number of people turning to us for help has dropped significantly. But it's clear some payday loan firms are flouting the FCA’s guidance and selling people loans costing hundreds of pounds that they struggle to pay back.

“The time has come for the FCA to turn its guidance into rules - forcing every single payday lender to carry out rigorous financial checks on potential borrowers to prevent people falling into deepening debt.

“Anyone thinking about taking out a payday loan or who is struggling to keep on top of their finances, can get help from Citizens Advice by going online or visiting a local service.”

Notes to editors

1. Data taken from online survey completed by 432 consumers who had attempted to use payday loans since January 2015. The survey was shared on Citizens Advice’s website, via debt advisors in local Citizens Advice and via the Money Saving Expert website. The survey ran from 1 March to 29 July 2016. Citizens Advice also conducted qualitative depth interviews with payday loan borrowers who had experience of accessing the payday loan market since the changes.
2. 800 staff and volunteers from across local Citizens Advice in England and Wales were also asked about their interactions with payday loan clients via an online survey in May 2016.
3. The Citizens Advice service comprises a network of local Citizens Advice, 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 get advice online or find your local Citizens Advice in England and Wales, visit citizensadvice.org.uk
6. You can get consumer advice from the Citizens Advice consumer service on 03454 04 05 06 or 03454 04 05 05 for Welsh language speakers.
7. Local Citizens Advice in England and Wales advised 2.5 million clients on 6.2 million problems in 2014/15. For full service statistics see our publication Advice trends.
8. Citizens Advice service staff are supported by more than 21,000 trained volunteers, working at over 2,500 service outlets across England and Wales.