Borrowing & Rollover Caps Needed

Limiting Payday Lending – The Need For Roll-Over Borrowing Regulation

Here at DoomsdayLoans.co.uk we are campaigning for a limit to the number of loans an individual can take out at any one time or on a repeat or roll-over basis.

Reports suggest that UK borrowers are taking out an average of 3.5 loans a year.

With trade discussions indicating that the UK payday loan industry aims to boost this average to 5 loans per person.

There needs to be effective safeguards put into place now in order to avoid UK payday loan borrowers from experiencing the same detriment as those in the US, where it has been estimated that 5,000,000 consumers each year are caught in a ‘cycle of debt’, where they become dependent on repeat borrowing at high cost in order to meet their basic living expenses.

Consumer Focus recommend that the number of loans or rollovers permitted per year should be limited to a maximum of five per household.

Research from the US, indicates that this step should prevent a potential debt trap scenario being established in the UK.

This could be achieved by clarifying the Office of Fair Trading (OFT) Irresponsible lending guidance, so that the definition of ‘unsustainable’ lending includes borrowers who take out more than five payday loans or rollovers in one year.

A limit of five loans per household should not significantly reduce the level of supply, as the market in the UK is currently operating at below this level of loans on average, and the UK industry have thus expressed their aim only to reach this level.

In addition, where consumers have borrowed or ‘rolled over’ up to a maximum of five times in one year, this should be treated as an indicator of financial difficulty and payday lenders should be obliged to refer consumers to independent advice and support to help them deal with any financial problems.

By limiting the number of loans or rollovers to a maximum of five per customer, payday lending should still be available for consumers to use them, but not to the stage where they are becoming an unsustainable debt.

The aim of putting a cap on the number of loans or rollovers allowed would be to prevent consumers getting themselves into a debt spiral where they reach a point where they are borrowing in order to service the loan which is now increasing rather than relieving their burden of indebtedness.

Qualitative research conducted by Consumer Focus has found that it is consumers on lower incomes who take out repeat loans or rollover their loans who experience the greatest difficulty with this form of lending.

In addition, it should also be recognised that where a household has taken out five payday loans with a 12 month period, that this is an indicator of possible financial difficulty and lenders should be therefore obligated to refer consumers to independent money and debt advice for help with any financial problems.