Overdraft ‘can cost you as much as taking payday loan’

The payday lending industry, which will come under tougher regulation next year, has come under heavy criticism in recent months for encouraging people to roll over their debts so that the original cost balloons.

But new research from consumer group Which? found that going overdrawn can be as “eye-wateringly” expensive as taking a payday loan and, in a similar way to rolling over a payday loan, people can rack up “sky high” default charges if they slip into an unauthorised overdraft.

Which? found that borrowing £100 for 31 days will cost £30 with a Halifax authorised overdraft or £20 with some Santander accounts, while borrowing the same amount for around a month with a payday loan firm such as Quickquid or Wonga costs between £20 and £37.

For consumers using the Halifax Reward current account and the Santander Everyday Account it can cost £100 in charges for going £100 into an unauthorised overdraft for a month, Which? said.

Which? wants to see new regulator the Financial Conduct Authority (FCA), which will oversee the consumer credit market from next April, cracking down on poor lending and unscrupulous practices across the market.

The FCA recently announced a raft of measures it plans to impose to improve the whole consumer credit market, including limiting the number of times payday 
lenders are allowed to roll over loans to two and forcing them to put “risk warnings” on their advertising.

Before a payday firm agrees to roll a loan over, it will have to explain to its customer how the costs will escalate and give free debt advice under the FCA’s plans.

The £2bn sector is currently under investigation by the Competition Commission, which is due to give its findings next year.

Which? is calling for the FCA to ban excessive charges across the whole consumer credit market so that default charges reflect lenders actual costs. It also wants to see a cap on default charges.

It is urging tougher affordability checks and wants an end to lenders making unsolicited increases to people’s credit limits.

The price of high-cost credit should be clearly displayed as pounds borrowed per £100 over 30 days, Which? said.

It wants to hear from consumers about their experiences of using credit, so it can share them with the FCA, which is consulting on its plans to clamp down on the sector.

Richard Lloyd, Which? executive director, said: “The Government and regulators have rightly focused on the scandal of payday lending, but they must not lose sight of the urgent need to clean up the whole of the credit market.

“Consumers need the credit market to work competitively. It’s time to clamp down on excessive charges and irresponsible lending, and to make sure borrowers are being treated fairly whatever form of credit they’re using.”

Anthony Browne, British Bankers’ Association chief executive, said overdraft charges for customers had fallen “significantly” in recent years.

He said: “The Office of Fair Trading estimates that customers are now up to £1bn better off due to reductions in these fees.

“The higher figures quoted by Which? are based on extreme examples of unauthorised overdrafts. This is not a form of borrowing we would ever recommend.”

He said consumers should take advantage of new rules recently introduced to make current 
account switching easier to choose an account that suits their needs.