BBC News Online Reviews a Short-Term Lending Study from the OFT

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An official study by the Office of Fair Trading (OFT), cited by BBC News Online last December, found that payday loans are an effective service that helps cover a gap in the credit market.

The OFT concluded interest charges from payday loan firms and other high-cost credit businesses should not be restricted, as price controls could potentially reduce the much-needed supply of short-term lenders. A decline in legitimate payday lenders could lead borrowers to turn to illegal loan sharks when short of money.

Much of the negative publicity surrounding payday loans is focused on their high interest rates. The OFT reports that if a loan is taken for just a few days, the charges can be less expensive and more convenient than an overdraft. The problem arises when a borrower cannot repay the loan as planned and opts to extend it, after which the interest racks up quickly.

The article links to another source on how to cope with debt problems.

Short-term borrowers consider payday loans a reasonable alternative to unauthorised bank overdraft charges. Consumer Focus estimated that 4.1 million loans were taken out in 2009 by 1.2 million people. In 2008, £900m in payday loans was taken out, according to the OFT’s review of high-cost credit.

The average payday loan borrower was “more likely to be a young male, earning more than £1,000 monthly, and in rented accommodation. Many are unmarried with no children”. Typical borrowers are employed and have a bank account, the OFT found.

There are an estimated 2,000 High Street payday loan shops and more than 100 online firms, which are more expensive. All lenders, from banks to payday loan companies, are required to get a consumer credit licence from the OFT.

The OFT’s review of high-cost credit began in 2009 in response to concerns that low-income consumers may lack affordable credit options.

BBC News Online is the most popular news website in the UK, receiving about 14 million unique visitors each week. To find out more about the OFT study, read the original article here.

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