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GLASGOW, SCOTLAND, January 21, 2013
/24-7PressRelease/ -- The move by the consumer watchdog comes following a growing number of concerns from MPs and debt campaigners about how the easy availability of high interest loans is pushing individuals into a vicious debt cycle from which they find it almost impossible to get out of.
Payday loans are a multi-billion pound industry in the UK and grew rapidly when the concept was first introduced from the US a few years ago. Scotland in particular has the highest level of payday loans in the UK, and the OFT is now beginning to scrutinise how they are being sold.
Under the
Consumer Credit Act, lenders
have a responsibility to ensure that the financial products they sell are appropriate to each customer's current financial situation. This involves not lending further credit to individuals who are already experiencing financial difficulties, something that
Payday loan firms currently make a lot of money from through their
'roll over loans'. Although individuals should pay off a payday loan when they receive their next salary payment, some still cannot pay back their debts and choose to roll the loan over - with the accompanying high interest rate and administration charges that go with it.
The OFT will be looking to see if these roll over loans breach the
Consumer Credit Law, and any loan firm found to flouting the rules and lending irresponsibly will have their credit licence revoked.
Yvonne McDiarmid, chief executive of Money Advice Scotland, said: "People's usual sources of credit have dried up, banks are not lending and even securing an overdraft is now becoming more problematic for some. The pay-day loans are relatively easy to access but part of the problem is the
'flipping' where they don't pay back that month's loan and easily get another loan to cover it. There are more middle-class and professional people who are struggling who are taking out loans because of the
rising cost of living. Across the board people are poorer than they were before."
The first step in the OFT's investigation is to complete spot checks on 50 major payday loans lenders, which will be followed by a careful assessment of the concerns that loans are being provided by lenders without appropriate affordability checks.
A spokesperson for
Trust Deeds Scotland provider, Scotishtrustdeed.co.uk, said: "It was only a matter of time before payday loan lenders went under the microscope. Some of the stories consumers are reporting about the
size of the debt they have built and the speed at which it happened are truly shocking. This investigation by
OFT cannot come soon enough."
Enterprise Minister Fergus Ewing has taken up the challenge where Margo MacDonald, MSP for Lothian, left off last year following the discovery that the
Scottish Goverment could regulate the credit deals under its existing powers: "
Bad Credit Payday Loan Companies often target their products at the
most vulnerable in our society. People can very quickly become
trapped in a cycle of debt, where interest rates of several thousand per- cent often apply. The current system, which is unregulated, is not fit for purpose. The Scottish Government would welcome greater regulation of this industry."
The OFT's investigation will conclude later on this year and result in an action plan based on its findings.
Scottish Trust Deed provides help and advice on all aspects of Trust Deeds. With a Trust Deed you can legally write off up to 90% of your debt and be completely debt free in 36 months. Use our Free Trust Deed Calculator to see if you quality.
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