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Sharp jump in payday loans raises concern over consumer borrowing

Cherry Reynard
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Cherry Reynard

New data from the UK regulator shows a sharp rise in high cost, short term credit such as payday loans.

Consumers took out 5.2m of this type of loan in the year to 30 June 2018, compared to 4.6m in the previous year. At the same time, the value of these loans also increased significantly – to £1.3bn, compared to £1.1bn for the same time last year.

The highest number of borrowers were in the 45 to 54 age category, though 25 to 34-year olds were close behind. This latter group were far more likely to be taking payday loans – 37% of payday loans were concentrated in this group.

Only 13% were homeowners, while 30% were tenants and a further 26% were living with their parents. Only 7% were in council accommodation. Worryingly, around 60% of payday loan holders were not confident of being able to pay the loan back.

Laura Suter, personal finance analyst at investment platform AJ Bell, said: “These loans will leave Brits owing £2.1bn thanks to high interest rates providers charge, even though the cost of borrowing has reduced in the past four years since the regulator introduced a price cap.

“People living in the North-West and North-East are most likely to take out loans, with 125 loans per 1,000 adults and 118 loans per 1,000 adults, respectively. This is closely followed by London, which has 114 loans for every 1,000 adults living in the area. However, Londoners are borrowing more than any other area, with average loans of £284 each, compared to £235 in the North East and £234 in the North West.

“Young people are increasingly turning to high-cost, short-term debt, with 55% of all payday loans being taken out by those aged 18 to 34, while this age group accounts for 44% of all short-term loans. In comparison, less than 1% of payday loans are taken out by those aged 65 and above.

The regulator’s cap on payday loan interest four years ago has been blamed for a number of loan providers leaving the market. Two years ago, there were 106 firms compared to just 88 today. The most high-profile exit from the market was Wonga last year.

Suter pointed out that the short-term loan figures are just one part of the UK’s debt problem – there is also around £45bn sitting on credit cards at the end of November last year, and another £6bn in overdrafts.