More than 60% of those who have taken out payday loans did so to pay for household bills or other essential items according to a new report from the consumer campaigner Which?.
One third of those surveyed said that they went on to experience more significant financial problems as a result of having taken out a payday loan with 45% complaining of being hit with unexpected charges.
The figures suggested that 57% were being encouraged to take out a further loan to pay for the original one, with 47% of people rolling over their loans "at least once".
One third of those surveyed said that they had been on the receiveing end of “unsolicited calls, texts and emails” before they had signed an agreement.
In an investigation incorporating 34 payday loan companies found one charging £150 if they repaid their loan ten days late, and most of the lenders investigated failed to clearly state their chrages or charged defaulting customers “excessively”.
Eight out of 34 of the companies investigated didn’t carry out any credit checks as part of the process of approving a loan, and two thirds of those surveyed were’t asked about their individual financial circumstances apart from their salary. Which? executive director Richard Lloyd said:
"With 1.2 million people taking out a payday loan last year, it is unacceptable for this rapidly growing number of people to be inadequately protected from extortionate charges and dodgy marketing techniques. At its worst, this booming £2billion industry can be seriously bad news for borrowers who are struggling to afford food or pay their bills. People are getting caught up in a debt trap, whacked with high penalty charges, or encouraged to roll over payments and take out more loans at inflated rates.
“The regulator should properly enforce the existing rules that apply to this industry, but they must go further and impose a cap on the amount that lenders can charge for defaulting. The Government should also now explore other ways to protect hard-pressed borrowers, including Australian-style measures to cap costs and promote affordable alternatives."
Responding to the research, Sarah Brooks, Director of Financial Services at Consumer Focus, said:
"This work is timely given the OFT's compliance review of payday lenders. There is clearly a continuing problem with payday loans and this should give further incentive, if any is needed, for the OFT to act quickly to protect consumers from spiralling debt."
John Lamidey, Chief Executive of the Consumer Finance Association, a body that represents payday lenders said:
"Despite the report's concerns that payday borrowers may get 'hooked', the fact is that payday loans actually make up a tiny proportion of overall consumer debt. In fact, for every £100 of problem debt, payday loans never make up more than £1.20 of that debt* whereas credit cards and unsecured (mainstream) loans together account for between 60% and 70% of unmanageable debt."