Debt problems with high cost credit products increase as payday loans decrease

28th September 2016

More and more people are struggling with debts for guarantor loans and rent to own credit products, Citizens Advice reveals today. The charity says there has been a shift in the high cost credit market as the number of people seeking help for problems with these sub-prime products has risen by 16% over the last year (from 1,962 between April and June 2015 to 2,272 in the same period this year), while the number of people with payday loan debt problems has decreased. Over the last 12 months Citizens Advice helped 7,500 people with rent to own debt problems, 1,100 with guarantor debt problems and 460 with logbook loan problems.

Since the introduction of a price-cap on payday lending in January 2015, the number of people coming to Citizens Advice for help with payday loan debts has fallen by more than a half (53%). The cap means if you take out a payday loan you won’t pay back more than twice the amount you originally borrowed.  Analysis from the charity shows customers of other types of high cost credit are paying more than double the loan:

 A £3,000 loan from a guarantor lender paid back over 5 years could cost a total of £7,114 – 137% more than the original loan.

  • A logbook loan of £3,000 paid back over 12 months could cost a total of £6,980 – 133% more than the original loan. Over 3 years, the longest term available, the total cost would be £14,880.

  • A £607 cooker from a rent to own provider to be paid back over a period of 3 years would cost a total of £1,216, just over 100% more than the original loan.  However the original prices of the items are much higher than in other stores.

Citizens Advice says the Financial Conduct Authority should consider extending the cap to other high cost credit products when it carries out its review of the price cap on payday loans next year.

When a person takes out a guarantor loan, a friend or family member agrees to act as a guarantor, which means they will pay off the loan if the borrower defaults. The number of people who sought Citizens Advice’s help with guarantor loan debts increased by 45% in the last year, from 221 between April and June 2015 to 322 in the same period this year.

Evidence from Citizens Advice reveals that people are often put down as a guarantor without being given clear information about their responsibilities. The guarantor may therefore be unaware that they are liable for thousands of pounds of someone else’s debts if the borrower misses payments, and in extreme cases having to pay for this even though the borrower has died. In the last 12 months, we helped guarantors with twice as many debt problems as the borrowers themselves (890 times compared to 435).

People using rent to own products will ‘buy’ a product from a hire purchase store and agree to pay it back over a period of time with added interest. If the buyer defaults on a payment the item can be taken away – regardless of how much they have already paid.

The number of people seeking help for rent to own debts has gone up from 1,612 between April and June 2015 to 1,858 for the same quarter this year.  In some cases people are paying for compulsory service charges of hundreds of pounds when it is not made clear by the firm what these are for.

Gillian Guy, Chief Executive of Citizens Advice, said: “High cost credit problems are growing in other parts of the market. People are struggling with debt problems from logbook loans, guarantor loans and rent to own. But is not just the rates of interest and charges that are causing difficulties.  Poor business practices – like signing people up as guarantors without explaining what this means or charging a much higher price for rent to own goods – are adding further misery. The cap has been effective in reducing the number of debt problems caused by payday loans – so it is worth considering if it should be extended to cover other types of high cost credit.

“It is important that loans are only offered to people who can afford to repay them. The FCA currently issues guidance to lenders saying they should perform rigorous financial checks on potential borrowers to make sure they can afford to payback their loans, but the FCA should now consider making this into a compulsory rule for all lenders of high-cost credit.”

Logbook lenders were explicitly excluded when the Financial Conduct Authority put the cap in place in 2015. The payday loan cost cap only applies to agreements that are for 12 months or less, so guarantor lenders and rent to own shops escape this rule because the agreements they offer are typically for longer periods.

Customers taking out a logbook loan secure the loan against an item – often a car – which can be taken away if they default.

Just last week the Law Commission proposed new rules for logbook loans including being able to end their liability for the loan by handing the car back to the lender if they can’t keep up with repayments and the need for lenders to have a court order to repossess a vehicle if the borrower cannot keep up with repayments but has already repaid more than one-third of the loan.

A report from Citizens Advice, published in August, revealed that the cap on payday loans – and other measures introduced by the FCA – have lead to a reduction in payday loan problems and a number of lenders leaving the market.  However it also found that some lenders are still giving out loans without proper credit checks and called on the FCA to turn its responsible lending guidance into rules for the payday loan industry.