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Payday lenders’ excessive fees are ‘unlawful’ – Which?

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Which? has accused payday lenders of 'exploiting borrowers' and acting unlawfully by charging excessive default fees.

According to the consumer rights group, ten of the 17 leading payday lenders have default fees of £20 or more and four charge £25 and above, with Wonga topping the table at £30.

The Which? report said that these excessive default fees are unlawful under the Unfair Terms in Consumer Contracts Regulations 1999 (UTCCRs), which state it is unfair for lenders to charge a disproportionately high fee if borrowers default on a loan.

In 2006, the Office of Fair Trading found that penalty charges for credit cards should be no more than £12, unless there are exceptional factors.

Richard Lloyd, executive director at Which? said: “We believe payday lenders are exploiting borrowers with excessive fees which can push them even further into debt. If they cannot justify why these charges are so high and refuse to cut them, we would look to take further steps to protect vulnerable consumers. The regulator must also take action to ensure all fees are fair, proportionate and only reflect lenders’ costs.”

According to a Which? report, high charges are one of the biggest factors that ‘tip borrowers into a spiral of debt’.

Previous Which? research found that more than half of payday loan users (56%) had incurred charges for missed or bounced credit repayments over 12 months, compared to 16% for all credit users. One in five payday users (20%) said they had been hit with ‘unexpected charges’.

Which? is calling for the Financial Conduct Authority (FCA) to introduce a cap on the level that firms can charge in default fees, as part of the cap on the total cost of credit planned for January 2015.

Late last year, the FCA announced it is to introduce an interest rate cap on payday loans, following reports that the payday loans industry is ‘trapping vulnerable borrowers in debt’.

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