Call to 'clean up' credit market
Consumer campaigners are urging stronger action to "clean up" the credit market after finding that going overdrawn with your bank can be as expensive as using a payday lender.
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 £2 billion 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 cost of high-cost credit should be clearly displayed as pounds borrowed per £100 over 30 days, Which? said.
The consumer group 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. High street bank overdraft fees can be just as eye-watering as payday loans.
"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 £1 billion 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 that 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.
Russell Hamblin-Boone, chief executive of the Consumer Finance Association (CFA), which represents major short-term lenders, said its members were "responsible payday lenders who are committed to transparent communication with no hidden charges".
He said: "People want and need clear, jargon-free information to help them make better financial decisions.
"Indeed, our own research shows that three quarters (72.1%) of people would prefer to compare financial products in pounds and pence and often have no idea how much it costs them to borrow money because charges are hidden or disguised by confusing APRs (annual percentage rates).
"So it is right to level the playing field."
Mr Hamblin-Boone said CFA members were "resolutely committed" to protecting consumers by regularly reviewing standards, working closely with the regulator and driving out irresponsible lending practices in the industry.
Here is the cost of borrowing £100 for one month in an authorised overdraft according to Which?'s findings:
:: Halifax, Reward Current Account, £30
:: Santander, 123 Account, £20
:: Santander, Everyday Account, £20
:: Nationwide, FlexDirect, £16
:: NatWest, Select Account, £8
:: RBS, Select Account, £8
:: Bank of Scotland, Classic, £7
:: Lloyds Bank, Classic, £7
:: TSB Bank, Classic £7
:: Barclays, Bank Account, £2
:: HSBC, £2
:: Co-operative Bank, Current, £1
:: Nationwide, FlexAccount, £1
:: Clydesdale Bank, Current Account Plus, £1
:: Yorkshire Bank, Current Account Plus, £1
:: First Direct, £0
And here is the cost of borrowing £100 for a month using an unauthorised overdraft:
:: Halifax, Reward Current Account, £100
:: Santander, Everyday Account, £100
:: Santander, 123 Account, £95
:: NatWest, Select Account, £90
:: RBS, Select Account, £90
:: Bank of Scotland, Classic, £82
:: Lloyds Bank, Classic, £82
:: TSB Bank, Classic, £82
:: Clydesdale Bank, Current Account Plus, £52
:: Yorkshire Bank, Current Account Plus, £52
:: Co-operative Bank, Current, £22
:: Nationwide, FlexDirect, n/a
:: Barclays, Bank Account, n/a
:: Nationwide, FlexAccount, n/a
:: HSBC and First Direct, £0 for customers who have not breached their authorised overdraft limit in the previous six months, or £25 for those who have.
And here is the cost of borrowing £100 through a payday loan for around a month, according to Which?:
:: Wonga.com (30 days) £37
:: The Money Shop (Loan to your next payday, so period may be shorter than 31 days) £ 30
:: Payday UK (Loan to your next payday, so period may be shorter than 31 days), £ 30
:: Quickquid (Loan to your next payday, so period may be shorter than 31 days and c ost of credit depends on your credit rating) £ 20-30
:: Cash Lady (28 days) £ 29